Why You Should Sell UNG, Buy FCG

Natural gas prices have taken investors and traders alike on a dismal ride down a slippery slope that few could have predicted. Many are worried that fuel prices won’t recover any time soon given the overarching fundamentals. Developments in the fracking process coupled with uncharacteristically mild weather have translated into weaker than expected demand along with towering stockpiles; two major headwinds for any commodity. Record low natural gas prices may be discouraging even the bravest of investors from speculating in the current environment, however, indirect exposure through the equity market may present itself as an appealing approach for some [see 25 Ways To Invest In Natural Gas].

Those betting on a turnaround in the United States Natural Gas Fund (UNG) have probably lost their nerve multiple times over the last year seeing as how this ETP has been consistently sinking and making new lows along the way. UNG completed a reverse 4-for-1 split in late February of this year because the share price had sunk dangerously low to the $5 level. Nonetheless, this effort proved futile in the face of selling pressures and UNG has once again resumed its long-term downtrend [see also 12 High-Yielding Commodities For 2012].

Commodity prices are influenced by three major factors: supply, demand, and speculation. However, the ever changing combination of these factors is likely too complex to deal with for the average investor, which makes UNG a less-than-ideal instrument for most. Investors who are intimidated by the volatility in the futures market, but still wish to make a play on natural gas, ought to consider FCG instead [see The Ultimate Guide To Natural Gas Investing].

The Appeal Of FCG

This ISE-Reverse Natural Gas Index Fund (FCG) tracks an equal-weighted index comprised of companies that derive a substantial portion of their revenues from the exploration and production of natural gas. Falling prices have certainly taken their toll on commodity producers, although FCG has fared considerably better than UNG over the past few years; in fact, UNG is down close to 30% year-to-date alone while FCG is flat [see also King Of Commodity Dividends: ETF Style].

Natural gas is becoming a bigger part of our global energy infrastructure and the recent price action in the futures market is simply reflecting the tremendous advancements of extraction technology in the industry, which has inevitably translated into unfavorable supply conditions for commodity prices. Demand for this fuel has been climbing at home as well as overseas given the increasing availability and affordability. FCG gives investors exposure to this corner of the energy market through a basket of 31 natural gas producers. The underlying portfolio is equal-weighted and thus no single holding accounts for more than 4% of total assets.

From a technical perspective, this ETF has been marching higher since bottoming out at $14.25 a share, although it has also failed to summit resistance at the $20 level on several occasions. Investors should note that FCG has considerable support around $17 a share given the spikes in trading volumes near this level. Those who are looking to buy in at current levels should be aware of the potential resistance that FCG could encounter as it approaches the $20 level [see also Beyond UNG: Three Intruiging ETFs To Play Natural Gas].

Disclosure: No positions at time of writing.

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  • Guest

    ISE-REVERE … –… NOT…: “Reverse”.