The fund managers of a the largest natural gas-related exchange traded fund (ETF) are being forced to change the makeup of their fund in order to manage the size of the fund while ensuring that it tracks the price of natural gas, as well.

United States Natural Gas (NYSEArca: UNG) will undergo some changes to its investment strategy to better manage the funds size and track the price of natural gas, reports Jon C. Ogg for 24/7 Wall St.

A recent filing with the Securities and Exchange Commission (SEC) revealed that UNG invested “primarily in futures contracts for natural gas, crude oil, heating oil, gasoline, and other petroleum-based fuels.”

While these will still be the primary vehicles, other ones the fund’s managers are considering include cash-settled options on futures contracts, forward contracts for natural gas, cleared swap contracts and over-the-counter transactions based on the price of natural gas, crude oil, other petroleum-based fuels, futures contracts and indexes. (Read about how swaps work in an ETF).

The fund’s presence in the natural gas futures market became the key target of the Commodity Futures Trading Commission’s (CFTC) focus on limiting the size of futures-based ETFs over concerns that such funds were causing volatility in the markets. (Read here for the full rundown). As a result, the providers of such funds have had to find creative ways to stay within these limits while still ensuring that their funds are operating optimally.

Some of the changes, however, may create higher risks that ETF investors need to be aware of – namely, the risk of tracking error.

For more information on natural gas, visit our natural gas category.

  • United States Natural Gas (NYSEArca: UNG): down 51.2% year-to-date

ETF UNG

Max Chen 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.