Different approaches to natural gas
As we saw in the previous part of this series, natural gas prices rose by ~1.9% between Friday, October 2, and Thursday, October 8, 2015. 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 ETF (UNG), which tracks prompt natural gas futures. UNG shares trade on the New York Stock Exchange like company stock. Notably, it rose by 1.4% between October 2 and October 8, 2015.
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 natural 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. It rose by a whopping ~15% between October 2 and October 8, 2015.
As you can see in the above graph, UNG mirrored natural gas prices throughout the week, but it gave slightly lower returns at the end of the weekly cycle shown.
XOP, on the other hand, was overperforming both natural gas and UNG throughout the week and gave the highest returns among the group on October 8. XOP’s superior performance can be explained by the increase in crude prices in the period we’ve been discussing. Crude prices rose ~8.5% between October 2 and October 8. Many upstream companies held by XOP are also exposed to crude oil prices.
You can also gain indirect exposure to energy prices and potential steady income by investing in MLP ETFs such as the Alerian MLP ETF (AMLP), which has holdings in large US midstream MLP companies like Enterprise Products Partners (EPD).
In the next part of this series, we’ll continue to analyze natural gas production and look at some forecasts.