The official-sounding but totally private United States Commodity Funds has launched another ETF based on natural gas prices. United States 12 Month Natural Gas Fund (UNL) started trading Wednesday (11/18/09). It joins the firm’s previous offering, United States Natural Gas Fund (UNG) in an attempt to offer small investors an easy way to participate in the natural gas market.
The new fund is a response to certain structural problems of UNG that resulted in dramatic underperformance relative to its benchmark, particularly in the last few months. This chart of UNG vs. natural gas futures tells the story well. The issue is that futures contracts expire and periodically have to be “rolled” to a later-dated contract. This is exacerbated when a market is in “contango,” which means prices farther out in the future are much higher than they are at present. This has been the case in natural gas lately. A secondary problem is that UNG must buy an enormous volume of futures contracts, and regulators don’t like to see such concentration in theoretically “public” markets.
UNL seeks to solve this problem by changing the bogey to an average of futures contracts spanning the next year, hence the “12 Month” part of its name. This should help the problem but will by no means eliminate it. The underlying conceptual flaws of UNG are still present in UNL; the added diversification simply means they will be less apparent at any given asset level.
Here is the ETF Professor's ETF Watchlist for Thursday November 19, 2009.
Let's try an interesting emerging markets play that has been getting hammered recently. The iShares MSCI Turkey Investable Market Index Fund ETF (NYSE: TUR) is down 10% in the past month.
The ETF Professor continues to like the way things are shaping in the coal sector and that's why he's recommending the Market Vectors Coal ETF (NYSE: KOL) again.
The iShares MSCI Taiwan Index (NYSE: EWT) was home to some bearish options trade on Wednesday, so watch it on Thursday.
While the Professor knows he mentioned this one yesterday, the bullish moves among dry bulk shippers are too much to ignore, so put the Claymore/Delta Global Shipping ETF (NYSE: SEA) on your watchlist again.
The United States Natural Gas Fund (NYSE: UNG) continues to get hammered by the bears. UNG is always in play.
The UltraShort Real Estate ProShares (NYSE: SRS) was down nearly 4% on Wednesday, making it worth looking at on Thursday.
If you're in the mood for a dividend trade, try the WisdomTree LargeCap Dividend ETF (NYSE: DLN).
Tired of being bullish on gold? Try the DB Gold Double Short ETN (NYSE: DZZ). Just to be clear, the Professor is NOT bearish on gold.
Financials were fairly strong on Wednesday, so let's watch the iShares Dow Jones US Financial Services ETF (NYSE: IYG) on Thursday.
Commodity-related exchange traded funds (ETFs) have been put through the gauntlet by regulators, but the rules and restrictions may ease if the industry is being too restricted.
Lara Crigger for IndexUniverse caught up with John T. Hyland, chief investment officer and portfolio manager of U.S. Commodity Funds, to talk about the regulatory impact on commodity exchanges, [...]
The chart below sure tells us what is happening with (UNG) – the biggest natural gas related ETF available. Look at the differential between the Natural Gas pricing (futures) and the ETF (UNG). We have written about this before HERE.
The problem is that there is an usually high level of contango with natural gas and [...]
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“For better or worse, the more likely culprit for the uptick in market mood swings is the increased popularity of ETFs. As more take bets on sectors and asset classes rather than individual stocks, it has become a market where good news lifts all boats, and bad news sinks all ships.” (Bespoke)
The stock market is [...]
I’m going to skip a recap of what sucked and worked today, but let it be known that I kicked ass on MON and BG yet index trades sucked.
I want to talk about me planting my flag in the ground and calling a bottom in Natural Gas. Maybe tomorrow will go lower, maybe it won’t. [...]
Can USCF's new fund tackle the natural gas contango?
United States Commodity Funds' new ETF, the U.S. 12-Month Natural Gas Fund (NYSEArca: UNL), began trading yesterday, offering investors another easy access point to the natural gas market. But let's hope it sees smoother sailing than its controversial cousin, the U.S. Natural Gas Fund (NYSEArca: UNG).
Not only have regulators vociferously blamed UNG for distorting the commodity markets earlier this year, the fund has also performed dismally to date, dropping a whopping 61.24 percent since the beginning of the year. And it's not because investors have lost their taste for the fund: Last month, UNG still saw brisk inflows of $308 million, even as its net assets dropped $263 million.
Record-low natural gas prices have played their part in slashing UNG's returns, of course, but the big anvil weighing the fund down is the market's nasty case of contango. For the better part of the year, the front-month NYMEX natural gas futures contract has stayed cheaper than those with later delivery dates. And since UNG buys only the front-month contract, selling it near its expiration date to purchase the next-nearest month's contract, the fund has been stuck in a wicked cycle of "sell low, buy high" for months now.
UNL, on the other hand, may be able to avoid some (but not all) of the same pricing sting. Instead of focusing solely on the front-month contract, UNL purchases an equally weighted basket of futures contracts with delivery dates in each of the next 12 months. Two weeks from rollover time, the fund sells the front-month contract and buys the one 12 months out, essentially pushing the basket forward in time.
Given that currently UNG must absorb losses across 100 percent of its contracts during rollover, while UNL only experiences losses in 1/12th of its portfolio, this methodology should protect the latter somewhat from contango's vicious sting. But it can't make UNL entirely immune, considering the furthest-out contracts are still priced substantially above the front-month contract: Yesterday, the December 2009 contract closed at $4.254, while the December 2010 contract closed 45.7 percent higher, at $6.199.
Also consider that at 0.75 percent, UNL's expense ratio is a mite bigger than UNG's (0.60 percent), so when the contango lessens, any cost savings from choosing the former over the latter would naturally erode. And should the natural gas market flip to backwardation, UNL's staggered buying strategy would actually put it at a disadvantage to UNG.
But backwardation's not likely to happen in natural gas—at least, not anytime soon. To see inversion occur, we'd need to start seeing shortages in the physical commodity, yet natural gas stocks just hit an all-time high. In fact, the International Energy Agency recently predicted that even if demand rebounds, due to an extra-cold winter and economic recovery, we'll still see a natural gas surplus that will depress prices until 2015.
Will UNL ultimately outperform UNG until then? Obviously only time will tell, but we may be able to divine some clues from USCF's other 12-Month Oil Fund (NYSEArca: USL) and its UNG-analogous partner, the U.S. Oil Fund (NYSEArca: USO). Despite oil's price recovery, the commodity has also experienced heavy contango recently, and year-to-date, USL is up 38.84 percent, while USO is only up 22.87 percent.
Still, while I'm always happy to have more tools in the box, when it comes to natural gas, I'm not yet sure whether a flathead or a Phillips screwdriver would be better.
The official-sounding but totally private United States Commodity Funds has launched another ETF based on natural gas prices. United States 12 Month Natural Gas Fund (UNL) started trading Wednesday (11/18/09). It joins the firm’s previous offering, United States Natural Gas Fund (UNG) in an attempt to offer small investors an easy way to participate in the natural gas market.
The new fund is a response to certain structural problems of UNG that resulted in dramatic underperformance relative to its benchmark, particularly in the last few months. This chart of UNG vs. natural gas futures tells the story well. The issue is that futures contracts expire…
Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment - considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.
But chances are good that many won’t be smiling when they discover just what ...
The official-sounding but totally private 