US Commodity Plans 2X Inverse Gas ETF

September 30, 2011

 

 

 

U.S. Commodity Funds, the company whose $1.2 billion United Stated Oil Fund (NYSEArca: USO) was one of the earlier futures-based ETFs, has filed paperwork to launch two futures-based commodity plays, one a double-exposure inverse strategy focused on the natural gas market and the other a sugar fund.

Both the U.S. Natural Gas Double Inverse Fund (NYSEArca: UNGD) and the United States Sugar Fund (NYSEArca: USSF) will use futures contracts and derivatives, with UNGD providing twice the inverse daily performance of natural gas futures contracts traded on the NYMEX, while USSF will track sugar prices through the near-month futures contracts traded on the ICE Futures market.

Each will cost 0.75 percent in management fees, with total fees and expenses pegged at 1.12 percent and 1.08 percent, respectively, according to the filings the company made with the Securities and Exchange Commission.

A boom in commodities is now in its second decade amid strong demand for crops and industrial building blocks from fast-growing emerging market economies in countries such as China, India and Brazil.

The ETF industry has been quick to seize on commodities as an investment opportunity, with U.S. Commodity Funds’ plans for a sugar fund and a leveraged and inverse gas fund only the latest examples of innovation. More than $100 billion—or a bit more than a tenth of all U.S.-listed ETF assets today—is tied to commodities-related ETF strategies, according to data compiled by IndexUniverse.

Competitors

UNGD would join U.S. Commodity Funds’ other natural gas strategies such as the U.S. Natural Gas Fund (NYSEArca: UNG) and the U.S. 12-Month Natural Gas Fund (NYSEArca: UNL), as well as other funds such as Teucrium’s Natural Gas Fund (NYSEArca: NAGS) and a couple of iPath Natural Gas ETNs, including NYSEArca: GAZ and NYSEArca: DCNG.

UNGD would compete with the Direxion Daily Natural Gas Related Bear 2X Shares (NYSEArca: GASX), which will transform to a triple-exposure fund on Dec. 1. Direxion also markets a bullish version of GASX, the Direxion Daily Natural Gas Related Bull 2X Shares (NYSEArca: GASL), which also becomes a 3x ETF on Dec. 1.

Like all leveraged and inverse plays, UNGD is not intended as a buy-and-hold investment because the impact of compounding on the returns could be detrimental to investors.

“In a trendless market in particular, the NAV of the fund could decline substantially even if the price of natural gas remained largely unchanged, given a long enough time period of trendless trading or sufficient daily price volatility,” the company said in the filing.

On the sugar front, iPath also offers sugar-related products, such as the $11 million iPath Pure Beta Sugar ETN (NYSEArca: SGAR)—which tracks a Barclays Capital index that consists of a single futures contract. iPath also markets the $90 million futures-based iPath Dow Jones-UBS Sugar Total Return ETN (NYSEArca: SGG).

Both iPath sugar funds cost 0.75 percent in fees.

Neither of two proposed U.S. Commodity Funds ETFs is expected to distribute dividends, according to the filings.

 

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