Different approaches to natural gas
As we saw in the previous part of this series, natural gas prices fell by ~1.8% between Friday, October 16, and Thursday, October 22, 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. This ETF trades on the New York Stock Exchange like company stock. It fell by 2.6% between October 16 and October 22, 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 its indirect exposure to volatile natural gas prices, an ETF such as XOP could be a safer, more diversified option for more conservative investors. However, it fell ~5.7% between October 16 and October 22, 2015.
As you can see in the above graph, UNG mirrored natural gas prices throughout the week, but it gave lower returns at the end of the weekly cycle.
XOP, on the other hand, was underperforming both natural gas and UNG throughout the week, and it gave the lowest returns among the group at the end of the week. The reason could be weaker crude oil prices, which fell ~4% between October 16 and October 22. XOP holds many companies that have exposure to crude oil prices, and therefore, these stocks likely pulled the fund lower.
You can 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 such as Enterprise Products Partners (EPD).
In the next part of this series, we’ll continue to analyze natural gas production and look at some forecasts.