Friday, August 31, 2012

The Comprehensive Guide to Natural Gas ETFs

Please do not take the following list as an endorsement or recommendation.
We prefer directional bets using options on futures.

Just kidding.

9.8:1 leverage on your initial futures margin should be enough for anyone.
(unless you have a corner, in which case drop us a line)

From Zacks via NASDAQ:
Types of Natural Gas ETFs
Natural gas ETFs are divided in two categories: futures and equity -based ETFs. Both of these will be detailed for investors looking to play in this increasingly important energy market segment:

Future-Based Natural Gas ETFs
United States Natural Gas Fund ( UNG )
Investors seeking direct exposure to the natural gas, a key fuel source for power plants, may find UNG an attractive option. It is the most popular and most liquid ETF, trading in about more than 10 million shares per day. Launched in April 2007, the fund has so far attracted assets of $1.2 billion (Read: Ten Biggest U.S. Equity Market ETFs ).

The product looks to track the changes in percentage terms of the price of natural gas futures contracts that are traded on NYMEX. The fund takes positions in the near month futures contracts on expiry and rolls over to the next month futures contracts. As the prices of next month futures contracts exceed that of the near month futures contracts (also called "contango"), the fund loses on rolling making strong long term performances very weak.

Hence, UNG is vulnerable to the prolonged period of contango (Read: ETF Investors: Beware the Coming ETN Backlash ). The fund lost about 19% so far this year and charges fees of 60 bps per year from investors.

iPath Dow Jones-UBS Natural Gas ETN ( GAZ )
The ETN seeks to match the performance of the Dow Jones-UBS Natural Gas Total Return Sub-Index. This represents a benchmark of the commodity of natural gas, a critical fuel for heating and cooling across the United States. The product is highly traded with a solid volume of more than 400,000 shares a day although it has just $51.6 million in AUM.

The product was launched in October 2007 and in August of 2009, Barclays had suspended fresh issuance in GAZ. This had given ETN a push to the higher premiums. Once this happened, the premium reached to unprecedented levels of nearly 134%, one of the highest that investors have ever seen in the space. This massive premium has begun to recede in recent months and is now 'only' 50%. 
Due to the heavy fluctuations in the premium, this ETN is the most volatile fund making it a risky play. The fund lost around 11% year-to-date and charges 75 bps in fees per year.

United States 12 Month Natural Gas Fund ( UNL )
Investors seeking direct exposure to the natural gas market may also play with this fund. Unlike UNG which only holds next-month contracts, this ETF spreads its exposure across the maturity curve. In fact, the fund consists of 12 natural gas futures contracts consisting of the near month security as well as the next eleven months (See more ETFs in the Zacks ETF Center ).

This approach can help cut down on contango because only 1/12th of the portfolio is rolled at any one time and a month of heavy contango will only impact a small portion of the holdings. Similarly, the fund will benefit less from backwardation (the price of near-month futures contracts exceeds that of the next month contract). As a result, this balances the negative effects of contango and positive effects of backwardation better than most products.

Despite this feature, the ETF trades in small volumes of less than 56,000 shares per day and lost around 16% year-to-date (Read: Three Unlucky Equity ETFs ). Launched in November 2009, the fund has attracted assets of $43.8 million and charges 75 bps in fees per year from investors.

E-TRACS Natural Gas Futures Contango ETN ( GASZ )
Launched in June 2011, the ETN seeks to match the performance of the ISE Natural Gas Futures Spread Index. The fund takes short positions in the near-term month natural gas futures contracts and long positions in the mid-term futures contracts through a series of investments in natural gas sub-indices. As mid-term futures contracts are priced at higher prices than the near-term futures contracts, the fund capitalizes on the price differences due to an upward sloping futures curve.

With AUM of $11.1 million, the product is less volatile and trades in small volumes say nearly 13,000 per share on a daily basis. The fund seems to be costly relative to other ETFs in the space, charging investors a fee of 85 bps annually, as it does arguably have a more advanced strategy. Unlike other natural gas ETFs, GASZ generated returns of more than 1% year-to-date in the current turmoil

Teucrium Natural Gas Fund ( NAGS )
Launched in February 2011, this fund seeks a new way to play the natural gas market and reduces the effects of both contango and backwardation. Unlike UNG, the product spreads out exposure across multiple points on the curve.

The product invests in futures contracts in the nearest to spot month for the following four periods - March, April, October, and November. All four months are weighted equally giving the fund a balanced exposure across these key delivery dates. These four were chosen in particular because they give the fund a focus on the key times in the natural gas season at both the end and beginning of the heating and cooling seasons.
The fund has so far attracted assets of $3.7 million and trades in a tiny volume of less than 4,000 shares per day. It is a high cost choice in the space charging about 1.54% in annual fees. Despite its advanced features, the ETF declined nearly 10% this year to date....MORE