After touching a four-year high, natural gas prices are beginning to cool Monday. Investors have been hedging against the euphoria with inverse, or short, natural gas exchange traded funds.
The U.S. Natural Gas Fund (NYSEArca: UNG) was down 2.8% Monday after surging 17.9% over the past week.
However, over the last week, UNG only garnered $1.7 million in net inflows, according to ETF.com data. Meanwhile, the VelocityShares 3x Inverse Natural Gas ETN (NYSEArca: DGAZ), which tries to reflect the daily -300% performance of natural gas prices, saw $66.6 million in inflows. DGAZ gained 7.6% Monday.
“Investors appear to believe the natural gas price rally has gone too far after the 8% jump in the US Henry Hub benchmark last week on the back of the US east coast experiencing the coldest weather in over 100 years,” according to ETF Securities.
The short bets are paying off Monday as NYMEX natural gas futures drop 5.5% to $4.9 per million British thermal units. Natural gas futures ended above $5, the first time since 2010, last Friday. [Nat Gas ETFs Surge as Futures Top $5 for First Time Since 2010]
Investors are cutting positions in natural gas on worries that demand this week could be weaker than expected with temperatures less cold than previously forecasted, reports Nicole Friedman for the Wall Street Journal.
Natural gas is a major fuel for gas-powered indoor heating, accounting for half of U.S. households as a primary heating source.
“The forecast is a bit warmer than when we left the office on Friday,” Bob Yawger, director of energy futures for Mizuho Securities USA Inc., said in the article.
Nevertheless, Commodity Weather Group LLC warns that colder-than-average temperatures is still expected “over the next few weeks.”
The ProShares UltraShort DJ-UBS Natural Gas ETF (NYSEArca: KOLD) also provides an inverse play on natural gas. The geared ETF tries to reflect the -2x, or -200%, daily performance of natural gas prices. KOLD was up 4.8% Monday.
Due to the daily rebalancing and compounding effects over time, the leveraged funds may not perfectly reflect their 2x or 3x strategies over a long period. Investors have typically used geared funds as a short-term hedges or as speculative plays.
U.S. Natural Gas Fund
For more information on natural gas, visit our natural gas category.
Max Chen contributed to this article.