UNG’s performance

From March 30 to April 6, 2017, the United States Natural Gas ETF (UNG), which aims to track active natural gas futures, rose 3.3%. Natural gas futures rose 4.4% during the same period.

Natural Gas Is in a Bull Market, UNG Investors Aren’t Happy

On April 6, natural gas active futures were 30.1% above their 2017 low of $2.56 per MMBtu on February 21, 2017. It was the lowest closing price for natural gas futures since August 12, 2016. UNG rose 19.4% during this period and underperformed natural gas active futures. When securities rise more than 20%, they’re technically considered to have entered a bull market. So, while natural gas is in the midst of a strong bull market, UNG investors aren’t there yet.

Inventory data

UNG ended April 6, 2017, with a rise of ~0.6%, while natural gas futures rose 2%. On that day, the EIA (U.S. Energy Information Administration) announced that natural gas (GASX) inventories had risen by 2 Bcf (billion cubic feet) in the week ending March 31. Analysts estimated a rise of 10 Bcf. So, UNG didn’t react as positively as natural gas futures to the bullish data.

Does UNG track natural gas futures well?

On March 3, 2016, natural gas active futures hit a 17-year low. Natural gas active futures rose 103.1% from March 3, 2016, to April 6, 2017. During that period, UNG rose ~35.1%.

From June 20, 2014, to April 6, 2017, natural gas active futures fell 26.5%, while UNG fell ~69.1%. The nearly two-year downturn in crude oil prices started on June 20, 2014. Crude oil can impact the sentiment in the entire energy sector.

The above numbers show UNG’s lower returns compared to the returns of natural gas active futures. The lower returns were due to small losses UNG suffered when rolling its exposure to active natural gas futures from expiring futures.

Active futures traded at higher prices than expiring futures contracts in the fund. Due to this “contango” structure in the natural gas futures market, UNG underperformed natural gas in the last few years. Investors should keep this in mind when using UNG to play longer-term moves in natural gas prices.

Natural gas exposure

Apart from the United States Crude Oil ETF (USO), which tracks crude oil futures, and the energy equity ETFs we discussed in the previous part of this series, you might want to look at other ETFs and ETNs to play natural gas prices such as:

  • the ProShares Ultra Bloomberg Natural Gas ETF (BOIL)
  • the First Trust Natural Gas ETF (FCG)
  • the VelocityShares 3x Long Natural Gas ETN (UGAZ)
  • the Direxion Daily Natural Gas Related Bull 3X ETF (GASL)

In the next part, we’ll discuss how the rebound in oil is impacting Wall Street.

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