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Natural Gas Fund a Better Trade Than Natural Gas This Week

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Nov. 20 2020, Updated 3:30 p.m. ET

Different approaches to natural gas

Natural gas futures declined by ~1.2% this week. For retail investors who don’t have easy access to the futures market, there are safer, low-cost avenues to bet on natural gas prices.

The first avenue is the United States Natural Gas Fund (UNG), an ETF that tracks prompt natural gas futures. Shares of UNG trade on the NYSE (New York Stock Exchange) like company stock. UNG shares declined by 0.9% this week.

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The second avenue is an ETF like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which holds many American energy companies. Many of these energy companies have exposure to natural gas prices due to their upstream gas production operations. So because of the indirect exposure to volatile natural gas prices, an ETF like XOP is a safer, more diversified option for more conservative investors. But XOP lost ~1.6% this week.

Comparing performances

As we can see in the above graph, both ETFs as well as natural gas prices (NG in the graph) had a dismal week. Initially, UNG mirrored natural gas prices. Both NG and UNG fell steeply on June 3. We discussed why this happened in Part 2 of this series. UNG underperformed NG for most of the week but fell less than NG toward the end of the week.

XOP underperformed both NG and UNG for most of the week. They ended the week on Thursday with lower returns compared to natural gas prices and UNG. This is because XOP has companies with exposure to crude oil prices, which fell consistently for most of this week. You can follow our weekly recap of crude prices on the Market Realist Energy and Power page.

XOP holds premier American gas producers like Noble Energy (NBL), Range Resources (RRC), and PDC Energy (PDCE). NBL and RRC are also part of the iShares U.S. Energy ETF (IYE) and make up ~1.6% of the fund.

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