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Understanding Natural Gas ETFs’ Huge Rise Last Week

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Nov. 20 2020, Updated 12:17 p.m. ET

Natural gas ETFs

Between September 14 and 21, the United States Natural Gas ETF (UNG) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) rose 8.4% and 16.8%, respectively. These ETFs track natural gas futures. UNG holds active natural gas futures contracts while BOIL’s objective is tracking twice the daily changes of the Bloomberg Natural Gas Subindex.

Natural gas November futures rose 8.1% last week. Natural gas–weighted stocks Chesapeake Energy (CHK), Range Resources (RRC), and Southwestern Energy (SWN) rose 11%, 11.3%, and 15.7%, respectively. They were the outperformers on our list.

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Long-term returns

From March 3, 2016, to September 21, 2018, natural gas active futures rose 81.6% from their 17-year low while UNG and BOIL have given returns of 6.2% and -32.6%, respectively. Since March 3, 2016, UNG and BOIL have delivered lower returns than natural gas active futures, possibly due to a negative roll yield. BOIL’s actual and expected returns could also differ due to daily price changes. In a cost-of-carry model, ETFs’ underperformance due to negative roll yields reflects storage costs.

As of September 21, natural gas futures for delivery between November and December 2018 closed in ascending order, which could be a more negative development for these ETFs’ returns than natural gas.

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