Investors Bet Big On Worst Performing ETF Of 2017

March 14, 2017

Rising Demand, Falling Supply

Almost every category of natural gas supply and demand was moving in a bullish direction before the warm winter shook things up. During 2016, U.S. production dropped 1%; exports of liquefied natural gas increased from nothing to about 1 bcf/d; industrial demand climbed 2.5%; and electric power demand jumped 3.2%.

Prices were on their way to up, too. From a 17-year low of $1.61/mmbtu reached in March 2016, natural gas futures increased to just below $4 by the end of the year (which was a two-year high at the time).

Today natural gas is trading close to $3 after the warm-winter pullback, but perhaps Mother Nature has merely provided investors with an opportunity to buy before the recovery in prices resumes.

Natural Gas Prices

That seems to be what investors are thinking. Since the start of the year, UNG saw $79 million worth of fresh money come into the fund. Even more, the triple-leveraged UGAZ saw a whopping $748 million worth of inflows in the period.

With about $650 million in current assets under management, UGAZ is now the largest natural gas exchange-traded product on the market, surpassing the $500 million UNG. That means that many investors are betting boldly and aggressively that natural gas will bounce from here.

Reasons To Be Optimistic On NatGas

Whether a bet on UGAZ pays off is hard to say. Leveraged ETFs are notoriously difficult to make money on due to performance-drag issues from daily rebalancing. But there's reason to be cheerful about natural gas in general.

Supply is falling and demand is rising, and these variables could continue moving in a bullish direction. President Trump's "economic nationalism" agenda means that more manufacturing may be done in the U.S., lifting industrial demand for natural gas.

 

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