Five ETFs to Ride the Natural Gas Rally

Few commodities have been in the news as much as natural gas has in 2012. After an abysmal multi-year run, NG seemed to have no momentum behind it and most investors had given up hope. But earlier in this year saw some much needed relief for the fossil fuel as temperatures across the nation were hotter than normal, spiking demand for NG. Ever since, natural gas and its related investment securities have been on a tear, with the commodity itself tacking on 70% in the last three months alone [for more natural gas news subscribe to our free newsletter]. 

With eye popping gains like that, many investors are chomping at the bit to make a lucrative play on natural gas. Below, we outline five ETFs that will help you take advantage of this stellar performance from NG, for as long as it lasts.

United States Natural Gas Fund (UNG)

By far the most popular natural gas ETF in existence, UNG is home to over $1.2 billion in total assets. The fund is a trader’s favorite, exchanging hands over 13 million times each day. UNG had been called one of the worst ETFs of the last few years as NG’s debilitating losses forced this fund to reverse split multiple times just to stay open. But now that natural gas is clawing its way back, UNG has been a lucrative investment. The fund tracks front-month natural gas futures and charges an annual fee of 60 basis points. UNG has gained over 50% in the trailing three months [see also Inside Natural Gas and UNG’s Wild Q2].

Quick Stats (as of 8/1/2012)

• Total Assets: $1.2 billion
• Average Daily Volume: 12.8 million
• Expense Ratio: 0.60%
• YTD: -14.7%

Ultra DJ-UBS Natural Gas (BOIL)

This relatively young ETF caught fire over the past few months, propelling it to take the positions of second largest NG ETF. BOIL also utilizes futures contracts for its exposure but applies a 2X leverage, making it an especially attractive investments during bull runs for the commodity. In the past three months alone, BOIL has jumped by nearly 90% due to its underlying leverage. But be warned, the leverage works in both directions; if natural gas prices begin to plummet, this fund will be hit especially hard. This fund should only be used by active traders or those who have the ability to constantly monitor their positions, as BOIL can turn on a dime.

Quick Stats (as of 8/1/2012)

• Total Assets: $73 million
• Average Daily Volume: 240,000
• Expense Ratio: 0.95%
• YTD: -43.0%

United States 12 Month Natural Gas Fund (UNL)

UNL takes a different approach to natural gas investing; instead of purchasing the front-month contract and rolling every four weeks, this fund maintains equal exposure to the next twelve contracts available. This may appeal to investors who have fallen prey to the contango that eats away at front-month products like UNG. Natural gas is quite often in a contangoed environment, meaning that when a fund like UNG executes its automated roll process, its sells low and buys high, instantly erasing value for the investor. This fund rolls by selling the near month contract, and buying into the twelfth month out in an effort to avoid short-term contango issues. Note that this strategy comes with a relatively high price tag, as UNL charges 75 basis points for investment [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

Quick Stats (as of 8/1/2012)

• Total Assets: $48 million
• Average Daily Volume: 38,000
• Expense Ratio: 0.75%
• YTD: -12.0%

3x Long Natural Gas ETN (UGAZ)

If you’re looking to make a bold bet on natural gas continuing its bull run, look no further than UGAZ. Launched earlier in the year, this fund takes natural gas futures and applies a 300% leverage, allowing one to make handsome profits during strong periods for NG. Again, this process works in reverse as well; if NG were to take a nosedive, UGAZ would get absolutely slaughtered. As with BOIL, UGAZ is intended only for active traders who fully understand the risks and complexities behind its investment methodology. UGAZ jumped more than 160% during NG’s most recent gains and has room to go even higher.

Quick Stats (as of 8/1/2012)

• Total Assets: $14.8 million
• Average Daily Volume: 111,000
• Expense Ratio: 1.65%
• Performance Since Inception: -21.2%

E-TRACS Natural Gas Futures Contango ETN (GASZ)

To be perfectly blunt, this fund does not receive nearly the attention it deserves. GASZ employs one of the most unique strategies in the ETF world, and it has paid off to its investors. Designed to profit from contango, GASZ takes short positions in front-month natural gas contracts and long exposure in mid-term futures, allowing it to profit from a contangoed environment. In fact, GASZ is the only non-leveraged/inverse natural gas ETF to have positive net gains thus far in 2012. Keep a close eye on the futures curve if you choose to utilize this fund as a slip into backwardation would mean trouble for GASZ’s exposure [see also How to Trade Natural Gas Futures: UNG and Beyond].

Quick Stats (as of 8/1/2012)

• Total Assets: $11 million
• Average Daily Volume: 10,700
• Expense Ratio: 0.85%
• YTD: 1.8%

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Photo courtesy of Wolfgang Thieme

Disclosure: No positions at time of writing.