United States Commodity Funds recently won regulatory approval for its newest addition: a 12-month natural gas exchange traded fund (ETF). The fund is expected to begin trading tomorrow.
The U.S. 12 Month Natural Gas Fund (NYSEArca: UNL) has gotten the green light from regulators to issue about 30 million shares, which will purchase natural gas futures for delivery over the next 12 months. Asjylyn Loder for Bloomberg reports that it will sell the near-month contract as it approaches expiration and replace it with a contract for delivery in 12 months.
The ETF comes from U.S. Commodity Funds LLC, which also manages the popular $3.5-billion U.S. Natural Gas Fund (NYSEArca: UNG) and the $1.96-billion U.S. Oil Fund (NYSEArca: USO). (Natural gas ETF shifts strategy).
UNG differs from UNL in that UNG buys the near-month contract, then sells it each month as it nears expiration and buys the next month.
In terms of natural gas prices and futures, what’s the difference between UNG and UNL? UNL can help mitigate some of the impact of contango, which is when the front-month contract is higher priced than the contracts further out. By using the 12-month approach, the impact of contango is, on average, about two-thirds less than it would be in a fund that simply uses a front-month approach.
Which fund an investor chooses depends on what’s trying to be accomplished. When the markets are in contango, it’s no guarantee that a 12-month fund would do better. On the other hand, it could be beneficial for investors looking to lessen the impact contango can have. On the other hand, if someone is trading frequently and heavily, there might not be as much concern about contango. As the energy markets shift, it could be more advantageous to be in one fund over another – but it’s no guarantee in the volatile energy space. Many have learned that a single hurricane can change conditions rapidly.
Natural gas futures were wavering today. Below-normal temperatures in the Midwest and Northeast are anticipated to boost natural gas demand, but there’s only been modest growth in industrial production, reports Christine Buurma for Dow Jones Newswires. Until today, many traders had been betting that natural gas prices would fall in the coming months.
For more stories about natural gas, visit our natural gas category.
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.