The United States Natural Gas Fund (NYSEArca: UNG) is heading toward a first-quarter loss of nearly 10%, but UNG’s woes barely scratch the surface of how much natural gas exchange traded products have struggled through the first three months of the year.
The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ) entered Tuesday with a year-to-date loss of 37.3%, easily positioning the ETN as the first-quarter’s worst-performing non-leveraged exchange traded product. GAZ tracks the Bloomberg Natural Gas Total Return Index while UNG tracks front-month NYMEX-traded natural gas futures.
First-quarter declines for leveraged natural gas ETNs have also been dramatic. After losing 81.4% last year, the VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ) is down another 43% this year. Things have been so bad for natural gas ETNs that even the VelocityShares Daily 3x Inverse Natural Gas ETN (NYSEArca: DGAZ), the bearish equivalent of UGAZ, traded lower through the first quarter. [Nat Gas ETFs Diverge]
“With a decline of nearly 8% in natural gas so far this quarter, you would expect UGAZ — which benefits from an increase in natural gas prices — to be having a bad year, and DGAZ — which is a bet on falling natural gas prices — to be doing pretty well. The reality, though, is that both securities are down on the year. Yes, the UGAZ ETF is doing very poorly (down 42%), but DGAZ is also down by 6%, which is down almost as much as the commodity itself,” according to Bespoke Investment Group.
On the demand side, natural gas consumption is expected to increase for power consumption as gas generators replace old and dirtier coal-fired plants. However, plants could switch between gas and coal depending on price gains, which should keep a cap on gas prices. The switch to alternative and clean energy sources could also keep natural gas demand in check.
Furthermore, the U.S. could begin exporting excess natural gas to foreign markets, notably in Mexico where the country is constructing gas generators to meet rising electricity needs and faces limited additions to its gas production.
Equity-based natural gas ETFs have been punished as well. The First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), which is comprised of natural gas exploration and production companies, is off more than 4% year-to-date, a loss that is nearly times worse than that of the Energy Select Sector SPDR (NYSEArca: XLE).
The $240 million FCG has been vexed investors, lagging natural gas futures when the commodity rises and performing noticeably worse when the commodity declines. For example, FCG’s 2014 loss of 42% was nearly 50% worse than UNG’s 2014 tumble. Some investors have gone bottom-fishing with FCG this year as the ETF has added nearly $5.4 million in new assets. [Bearish Outlook for Natural Gas ETFs]
VelocityShares Daily 3x Long Natural Gas ETN
