USO versus UNG

From August 25 to September 1, 2016, the United States Oil ETF (USO) underperformed the United States Natural Gas ETF (UNG). USO fell by ~8.1%, while UNG fell by ~2.6%.

Energy Sector: UNG Fell and Outperformed USO

UNG ended September 1, 2016, with a fall of ~2.4% because of the EIA’s (U.S. Energy Information Administration) announcement that natural gas (UNG) (FCG) inventories had risen by 51 Bcf (billion cubic feet). Analysts and traders expected a smaller increase of 42 Bcf, according to the Wall Street Journal.

Earlier, on August 31, oil prices were held back by a large buildup in inventories. USO tracks crude oil futures.

Analyzing UNG’s performance

UNG rose by 42.3% from March 3, 2016, to September 1, 2016. During that period, natural gas futures rose by 75.2%. On March 3, US natural gas futures hit 17-year lows.

From June 20, 2014, to September 1, 2016, UNG fell by ~67.4% and natural gas futures fell by 36.6%. The almost two-year downturn in crude oil prices started from a peak on June 20, 2014. The downturn lowered the sentiment in the entire energy sector.

These numbers also show UNG’s lower returns compared to natural gas futures. This is due to the small losses that UNG suffers when rolling its exposure to active natural gas futures, which were higher in price than the expiring futures contracts in the fund.

Energy sector exposure

For exposure to the energy sector, you might want to look at energy ETFs that invest in oil and gas stocks instead of ETFs that offer direct exposure to energy prices such as USO and UNG. These energy ETFs include the Energy Select Sector SPDR ETF (XLE), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), the Fidelity MSCI Energy ETF (FENY), and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

In the next part, we’ll look at XLE’s performance compared to other SPDR ETFs.

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