ETF Of The Week: NatGas Volume On Fire

November 16, 2018

Strange things are afoot in the energy markets: The VelocityShares 3XInverse Natural Gas ETN (DGAZ) traded a record 169 million shares on Wednesday, Bloomberg reported.

To put that in perspective, that was more than the daily volume of the S&P 500 ETF Trust (SPY) or the Invesco QQQ Trust (QQQ).

DGAZ is an exchange-traded note designed to deliver three times the inverse of the daily returns of the S&P GSCI Natural Gas Index, a benchmark tracking front-month natural gas futures trading on the New York Mercantile Exchange. DGAZ is a bet natural gas prices will decline.

Prices of those futures spiked this week, as a cold snap unfurled across the country and fueled concerns of tight supplies. By Wednesday, natural gas prices had climbed 18%, their biggest increase in 14 years.

As a result, DGAZ, which is a geared inverse note, plummeted. So far this week, the ETN was down more than 70%.

Yet on Wednesday, DGAZ's daily volume surged to over 10 times its average volume for the past 45 days of 11.9 million shares.

DGAZ: A 'Next Gen' ETN

As a 3x inverse fund, DGAZ is definitely an instrument meant more for sophisticated traders than buy-and-hold investors. Perennially it is also among the most shorted exchange-traded products (read: "Most Shorted ETFs Of 2017").

Intriguingly, DGAZ is also something of a "next gen" ETN, in that its prospectus grants the issuer broad discretion to close in case of high volatility.

In the case of DGAZ, the note may be "accelerated," or liquidated before its maturity date of Feb. 9, 2032, should its intraday indicative value equal or fall below 15% of the previous day's closing indicative value.

Despite its heavy volume, DGAZ didn't quite hit that level on Wednesday. On Tuesday, the note closed at $6.2538, meaning its share price would have needed to fall below $0.94 on Wednesday to trigger the acceleration event. Instead, DGAZ closed at $2.86.

Echoes Of XIV

DGAZ isn't the first VelocityShares ETN to attract scrutiny after huge one-day volumes. Back in February, 24 hours after the biggest one-day spike ever in the Cboe Volatility Index (VIX), the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) was accelerated, after the note dropped from $115.55 to $4.22 over the course of one trading day (read: "Inverse VIX ETN Shuts Down").

Meanwhile, DGAZ's sister fund, the VelocityShares 3X Long Natural Gas ETN (UGAZ), which tracks the same index as DGAZ but without an inverse, was down 53% as of Thursday afternoon. (Though these notes track the same index with equal and opposite multipliers, discrepancies in their share price will arise, simply due to supply and demand market pressures.)  

 

 

(See: Why Natural Gas ETFs Are Soaring)

 

Contact Lara Crigger at [email protected]

Find your next ETF

CLEAR FILTER