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Natural Gas’s Whopping Upside: Gas ETFs React

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Natural gas ETFs

On November 2–9, the United States Natural Gas ETF (UNG) rose 13%, while the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) rose 25%. These ETFs track natural gas futures. UNG holds active natural gas futures contracts, while BOIL’s objective is to track twice the daily changes of the Bloomberg Natural Gas Subindex.

Natural gas December futures rose 13.2% in the past five trading sessions. UNG and BOIL underperformed natural gas’s rise during this period.

The large upside in natural gas prices could be positive for natural gas–weighted stocks. Cabot Oil & Gas (COG), Gulfport Energy (GPOR), Southwestern Energy (SWN), and Range Resources (RRC), the strongest among the natural gas–weighted stocks, rose 4.6%, 6%, 6.5%, and 8%, respectively, last week.

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Long-term returns

From March 3, 2016, to November 9, 2018, natural gas active futures rose 126.9% from their 17-year low, while UNG and BOIL returned 30.6% and -3%, 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 be different due to daily price changes. In a cost-of-carry model, ETFs’ underperformance due to the negative roll yield reflects storage costs.

As of November 9, natural gas futures for delivery between December 2018 and January 2019 closed in ascending order, which could be a negative sign for these ETFs’ returns compared to natural gas’s returns.

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