uploads///UNG VS NG

Why UNG Lags Natural Gas Returns

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Apr. 14 2015, Published 9:55 a.m. ET

United States Natural Gas Fund ETF

The United States Natural Gas Fund ETF (UNG) was down marginally by 0.16% and settled at $12.59 on April 13, 2015. UNG consists of natural gas futures contracts. It has assets worth $612 million and an average monthly volume of 7 million. UNG has an expense ratio of 0.60%. It’s the largest natural gas ETF.

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UNG rolling its futures position

The UNG futures roll during a four-day period. This starts at the end of the day on the date two weeks before the expiration of the front month contract in 25% increments each day. After the fourth day of the roll, UNG is expected to be fully exposed to daily changes in the second month contract. When the futures forward curve is in contango, the fund has to purchase contracts that are more expensive.

The natural gas futures are having a contango market. This means futures contracts are trading higher than spot natural gas prices. The natural gas June and May spread is at $0.037 as of April 13, 2015. During rollover, UNG has to purchase expensive next month futures contracts. This adds pressure to UNG’s performance. This results in UNG’s under performance with respect to its benchmark natural gas. As a result, UNG lost 14.76% YTD (year-to-date) compared to 12.74% YTD from natural gas.

Apart from ETFs, oil and gas stocks like Rice Energy (RICE), Cabot Oil (COG), EQT (EQT), and Ultra Petroleum (UPL) are also impacted by natural gas price movement. These companies have a natural gas production mix greater than 90% of their production portfolio. They account for 4.16% of XOP.

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