McCall’s Call: Japan Crisis Favors Gas ETFs

March 30, 2011

Beyond the troubling nuclear aftermath to Japan’s disaster, gas looms largely.

 

The earthquake and tsunami that ripped through Japan earlier this month has had a ripple effect on markets around the world. And, lurking within the disturbing nuclear aftermath, the disaster’s longer-term effects on the energy-generation sector are likely to be far reaching.

Matthew D. McCallIndeed, with radiation leaking from the crippled Fukushima Daiichi electro-nuclear complex, the future of nuclear energy is being openly questioned for the first time in decades.

So, with the risks associated with atomic energy being clear as a bell just now, other sources of power generation are being touted as safer; none more so than natural gas.

Luckily for ETF investors, a number of products are already on the market, providing different ways of getting exposure to a fuel and an industry that probably just got a huge shot in the arm from the calamity in Japan.

Natural Gas As An Alternative

Still, the U.S. government has a number of options apart from gas as it feels the pressure from anti-nuclear energy groups.

Firstly, the country could continue to rely heavily on oil it gets from unstable regions around the world. (For further details, please see all the headlines on the “Arab Spring,” the ending of which no one can predict.)

Or, the U.S. could rely even more heavily on coal, a relatively dirty option that already accounts for about 45 percent of the electricity generated in the U.S.

Also, some analysts fret that wind and solar, while still in the early stages of development, probably won’t be plentiful enough even when they are fully developed.

That leaves natural gas as the best option, though until now, it hasn’t gotten the recognition it should in the U.S.

Not only is the U.S. rich in gas reserves, the fuel is also a much-cleaner-burning fuel than either oil or coal. Plus, big-name advocates of natural gas, such as T. Boone Pickens, are touting gas’s bright future. Still, gas now accounts for just 21 percent of the electricity generated in the U.S.

Investing In Natural Gas

Investors who believe the U.S. must increase consumption of gas for electricity production as well as other purposes—such as a fuel for cars and buses—can take advantage of gas’ rising fortunes through a number of exchange-traded products.

The most widely known ETF is the US Natural Gas ETF (NYSEArca: UNG), which tracks the front-month contract of New York Mercantile Exchange natural gas futures.

However, the ETF has been notorious as one of the biggest laggards in the commodities market for two reasons.

First, the price of gas futures has lagged other energy commodities for several years due to an increase in supply and stagnant demand.

The second reason UNG has struggled is because the gas market is in contango. That means each contract it must roll into to preserve exposure is pricier than the one it is exiting that is about to expire, which eats into returns, sometimes dramatically. UNG has fallen 6 percent this year, and it has an annual expense ratio of 0.60 percent.

To try and combat contango, the same company that runs UNG introduced the United States 12 Month Natural Gas Fund (NYSEArca: UNL). The fund owns 12 futures contracts that include the front-month contract and the 11 that follow. The goal is to minimize contango or backwardation—the opposite of contango when the front-month contract is the priciest.

Year-to-date, the contango-killing fund is still down 3.6 percent. It has an expense ratio of 0.75 percent.

 

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