Because it’s cleaner burning than coal and more plentiful than oil, some have called natural gas the fuel of the future. Here’s what you should know before jumping into natural gas exchange traded funds (ETFs).
Like other fuels, natural gas prices are heavily influenced by a variety of external factors: political events, social events, weather events and demand shifts.
Abraham Bailin for Morningstar reports that while production has been consistently increasing, demand has decreased thanks to a weak economy and mild weather in the last year. Lower demand, naturally, has pushed prices lower. Eventually, lower prices should encourage more usage.
According to ETF Daily News, on many levels, market liquidity and the absence of carrying costs make using futures via ETFs a better way to invest in natural gas than owning the commodity directly. Investors should still aim to understand the implications of futures trading, particularly how contango affects fund performance. [How Supply Glut Hit Natural Gas ETFs.]
Futures-based ETFs do not track the spot price, a point of confusion for some. Some ETFs invest in near-month futures contracts, and, as each month draws to a close it has to “roll” its position forward. Effectively, the fund sells its soon-to-expire position and purchases a contract further from expiration to avoid physical delivery. [Why Investors Are Shunning The Natural Gas ETF.]
Natural gas use is expected to increase over time, and as supply is used up, prices may rise accordingly. There are 11 ways to play natural gas with ETFs, according to the ETF Analyzer, including:
- United States Natural Gas (NYSEArca: UNG)
- iShares Dow Jones U.S. Oil & Gas Exploration & Production (NYSEArca: IEO)
- First Trust ISE-Revere Natural Gas (NYSEArca: FCG)
- ProShares Ultra Oil & Gas (NYSEArca: DIG)
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.