Natural Gas: A Tale Of Two Funds

June 18, 2009

While UNG keeps gaining assets, there's another natural gas ETF that's clobbering both the market and its much more popular rival.

 

Assets in the United States Natural Gas ETF have shot up in the past year. At the same time, the fund (NYSE: UNG) remains one of this year’s biggest laggards on the performance front.

“If you can find a good reason for people being so bullish, please tell me,” said Stephen Schork, president of the Schork Group, which is based in Villanova, Pa.

Heading into Thursday, UNG—which invests in natural gas futures—was down more than 31% in 2009. Just as significantly, the ETF has been dead flat since the broad stock market bottomed on March 9.

During that same period, the United States Oil Fund (NYSE: USO)—which invests in crude oil futures—has soared more than 30%. As a frame of reference, the Vanguard Total Stock Market ETF (NYSE: VTI) is up almost 20%.

Despite such relative under-performance, UNG’s net assets hit an all-time high after Monday’s close of just over $4.5 billion. At the end of March, that figure was just $700 million, and it was just $2.2 billion as recently as May 31. So, in less than two weeks, assets in UNG have more than doubled.

The ETF’s average daily volume has also increased significantly in the past several weeks. It hit 96 million shares last week after averaging about 19 million shares per day since opening in April 2007.

But why the sudden interest? Energy analyst Schork, who consults and conducts research for institutional investors, doesn’t see natural gas prices surging anytime soon. “Current supplies are at or near peak levels. And there’s no relief on the way,” he said.

In terms of demand, industrial production numbers for May issued this week showed that capacity utilization at the nation’s factories and mills were running at all-time lows. “It’s never been this bad,” said Schork. “That’s not good news for natural gas from a fundamental standpoint.”

Still, people are buying, perhaps thinking that natural gas will eventually join the rally.

“Most people are seeing gold, oil and other commodities rallying,” said Schork. “They’re pouring money into UNG thinking they can still get into the early stages of a commodities rally at relatively cheap prices. The thinking is that at some point, natural gas has to rebound.”

Another ETF To Consider

But there’s another side to the play for natural gas. UNG isn’t the only ETF focusing on the sector. The First Trust ISE-Revere Natural Gas ETF (NYSE: FCG) has been around for more than two years. It’s priced the same as UNG with an expense ratio of 0.60%.

FCG is up more than 17% so far in 2009. Just as notable, it has gained nearly 65% during the ongoing rally that started in March.

Its assets, however, haven’t followed suit—they’re stuck around $72.7 million, a fraction of UNG’s levels.

What’s the difference?

FCG invests in the stocks of natural gas companies. As such, the fund doesn’t directly provide exposure to the commodity of natural gas. It also includes some crude oil producers.

“Having some exposure to crude has helped from a return standpoint this year,” said Mark Abssy, indexing and ETF manager at the International Securities Exchange, which helped create FCG’s index.

Crude prices last summer were at historic highs, topping $140 a barrel, before falling all the way into the mid-$30 stage. This year, crude has inched up past the $70 per barrel range. “The index [used by FCG] includes companies like Royal Dutch, Noble Energy and Goodrich Petroleum that have exposure to both natural gas and crude,” said Abssy. “In fact, the index includes a lot of those types of companies.”

The case for investing in futures is that investors can get more direct exposure to an actual commodity’s price movements. But in the recession and subsequent rebound, while natural gas prices have dropped, corporate earnings in that energy subsector have held up better, says Abssy.

“It’s not just a zero-sum game. These companies are still making profits,” he said. “And natural gas providers are considered part of the alternative energy market, which over the longer term could provide residual benefits for stock investors.”

 

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