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UNG and XOP Underperform Natural Gas in Week to August 20

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Different approaches to natural gas

As we discussed in the previous part, natural gas fell 1.64% between Friday, August 14, and Thursday, August 20. For retail investors who don’t have easy access to the futures market, there are other safer, low cost avenues for betting on natural gas prices.

One avenue is the United States Natural Gas Fund (UNG), an ETF that tracks prompt natural gas futures. UNG shares trade on the New York Stock Exchange like company stock. UNG fell 2.16% between August 14 and August 20.

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Another avenue is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which holds many US energy companies in its portfolio. Some of these energy companies have exposure to natural gas prices through their upstream gas production operations. Because of the indirect exposure to volatile natural gas prices, an ETF like XOP could be a safer, more diversified option for more conservative investors. However, XOP fell by ~6.18% between August 14 and August 20.

Comparing performances

As you can see in the above graph, UNG overperformed natural gas prices earlier in the week, but it ended up lower at the end of our weekly cycle.

XOP on the other hand, was overperforming both natural gas and UNG initially in the week, but plunged mid-week, as we can see in the graph above, giving the lowest returns in the group at the end of the week. The decline was triggered by a drop in crude oil prices that plunged 3.2% between August 14 and August 20.

XOP includes US natural gas producers such as Noble Energy (NBL), RICE Energy (RICE), and PDC Energy (PDCE) in its portfolio. Combined, these companies make up 2.4% of the ETF. NBL fell by 8% between August 14 and August 20, and RICE fell ~2.12%. In the same period, PDCE fell by 7.72%.

You can also gain indirect exposure to energy prices and steady income by investing in MLP ETFs such as the Alerian MLP ETF (AMLP), which holds large US midstream MLP companies such as Enterprise Products Partners (EPD).

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