The United States Natural Gas Fund (NYSEArca: UNG) lost almost 23% over the past month and has the dubious honor of being one of the worst-performing non-leveraged exchange traded funds during the month of December.

Over the same period, the iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ), which tracks the Bloomberg Natural Gas Total Return Index, is off “just” 9.9%. That does not mean GAZ is a superior natural gas product. Rather, that discrepancy highlights the dangers of exchange traded notes (ETNs), of which GAZ is one, and ETFs trading at substantial premiums to their net asset values, which GAZ does.

“Last week, UNG dropped 12.5%.  The leveraged ProShares Ultra Bloomberg Natural Gas (NYSEArca: BOIL)was whacked for a 22.6% loss.  However, GAZ, an unleveraged product tracking the same index as BOIL, gained 5.9%,” reports Ron Rowland for Invest With an Edge.

Rowland notes that in over five years ago, Barclays, the issuing bank behind GAZ, suspended creations in the ETN and has yet to lift that suspension. At the time of the suspension, Barclays acknowledged it could “cause fluctuations in the trading value of such Notes.”

ETFs undergo a creation and redemption process in which market makers, authorized participants or large institutional investors swap a basket of securities from the underlying benchmark index for ETF shares, or vice versa.

Because market makers cannot create new shares of GAZ, keeping the ETN near its NAV is impossible, according to Rowland. GAZ closed at $2.01 on Friday, but sported a closing indicate value of $1.47 on Jan. 1, according to iPath data.

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