Natural gas traders are finally getting a break as lower inventories and rising demand helped supported a price rally. Investors can also capture the upside in the energy commodity through a number of exchange traded fund options.
The largest natural gas ETF, United States natural Gas Fund (NYSEArca: UNG), tracks Nymex natural gas futures contracts. The natural gas ETF rolls contracts, or sell a contract that is about to expire for a later dated contract, over from month-to-month, so investors are susceptible to shape of the futures curve. Specifically, when the futures curve is upward sloped – higher prices over a longer time frame, the market is said to be in “contango,” which could weigh on UNG’s performance as the fund keeps rolling into costlier front month contracts.
“In contangoed markets, a fund like UNG can suffer heavy losses even as natural gas prices rise, warranting investor caution,” according to Morningstar analyst John Gabriel.
UNG is up 16.9% over the past year. The fund has a 0.85% expense ratio.
The United States 12 Month Natural Gas Fund (NYSEArca: UNL) tries to mitigate the effects of contango by laddering its holdings with 12 months’ worth of natural gas futures. While holding multiple contracts with varying maturities could help even out the performance, the fund could underperform in a backwardated market – a downward sloping futures curve where contracts with a later date are cheaper than the current spot price. UNL is up 7.6% over the past year. The fund has a 0.75% expense ratio.
The Teucrium Natural Gas Fund (NYSEArca: NAGS) also tries to spread out its natural gas futures exposure through contracts for March, April, October and November traded on the NYMEX each weighted at 25%. NAGS has a 1.54% expense ratio and is up 7.7% over the past year.
For those who are wary of the natural gas rally, an ETF with varying futures exposure could provide a little more downside protection.
“NAGS is further out on the curve than everyone else,” Sal Gilbertie, President, Chief Investment Officer and co-founder of Teucrium, said in a phone interview. “The ETF responds slower to a rising market but also responds slower to a lower market.