UNG tries to reflect the performance of natural gas. The trust invests in natural gas futures contracts traded on the NYMEX that is the near month contract to expire. The fund is nondiversified.
Currently, natural gas prices are in backwardation, which is more favorable to UNG than it is to United States 12-Month Natural Gas (NYEArca: UNL) – UNL does better when it’s in contango, so investors don’t lose out on the roll yield. [Natural Gas ETFs: Ready to Rumble?]
To clarify:
- Contango occurs when future prices are above the expected future spot price, writes David Harper for Investopedia. Since future prices must settle at expected future spot prices, contango implies that future prices will diminish over time as it converges with the expected future spot price.
- Backwardation occurs when future prices are below expected future spot prices. Speculators who are “net long” will benefit because future prices are increasing to converge with expected future spot prices.
For more information on natural gas, visit our natural gas category.
Max Chen contributed to this article.
For full disclosure, some of Tom Lydon’s clients own shares of UNG.