Gas prices are on the rise, which has led investors to pour money into the natural gas exchange traded fund (ETF), as well. This could have some consequences if it keeps up.
United States Natural Gas (UNG) has seen its assets balloon from $670 million in February to $3.7 billion. But the fund may have gotten too popular, says Ian Salisbury for The Wall Street Journal. Funds that hold commodities generally have limits on the number of shares they can issue to meet demand, and UNG may be approaching the limit.
A filing with the Securities and Exchange Commission (SEC) shows that managers want to increase the available shares almost tenfold, but those requests often take weeks. What happens in the meantime? The shares could trade at prices higher than the underlying value of its holdings.
When contacted, John Hyland, portfolio manager and chief investment officer at U.S. Commodity Fund, said that this filing is a routine matter and they expect no unusual problems. According to the SEC’s website, this is the fifth time more shares for UNG have been filed.
ETFs typically create new fund shares whenever investors demand them, but commodity funds are a different breed with a unique structure.
Despite rising natural gas prices in recent days, the cost is still low at $4 per million BTU compared to last July, when they were $13. What’s going on?
Supplies are abundant right now, and low prices could cause a shift within the electrical power industry. The onset of lower natural gas prices is bad for the coal industry, in that it has long been a source of fuel for the electric-power industry, reports Rebecca Smith and Ben Casselman for The Wall Street Journal.
The demand for electrical power is lower at this time, which could cause power companies to invest billions in natural gas companies, rather than coal. This would cause a shift within the industry that is over 100 years old, as coal is one of he biggest producers of electrical power.
The trend also developed in the 1990’s, with the power industry interested in natural gas, as states deregulated their electricity markets, a new breed of so-called merchant generators built scores of gas-fired plants, encouraged by rosy supply forecasts and easy borrowing.
New natural gas discoveries have been found in Texas, Louisiana, and Pennsylvania which also supports the case for natural gas as a strong power source.
- United States Natural Gas (UNG): down 32.2% year-to-date
- Market Vectors Coal ETF (KOL): up 64.4% year-to-date
- PowerShares Global Coal (PKOL): up 74.5% year-to-date
- iPath Dow Jones AIG Natural Gas ETN (GAZ): down 34.9% year-to-date
For more stories on natural gas, visit our natural gas category.