Natural Gas ETF
What Is a Natural Gas ETF?
A natural gas exchange-traded fund (ETF) is a type of pooled investment product that gives investors exposure to natural gas prices. These funds are frequently regulated by a professional manager, who invests for the investors, and will generally invest in a basket of natural gas futures contracts as opposed to hold stocks of natural gas companies.
Grasping Natural Gas ETFs
Natural gas is a commodity that fills some needs. It is utilized as a source of energy for heating, cooking, fuel, and power generation as well as to make plastics and other organic synthetics.
Investors really should figure out the difference between natural gas ETFs and other well known types of ETFs. Numerous ETFs own their underlying assets straightforwardly, for example, gold ETFs that own physical bullion or industry-area ETFs that own the shares of companies operating in their industry.
Natural gas ETFs, nonetheless, typically own no physical natural gas. All things being equal, they own natural gas by implication by purchasing natural gas futures contracts that trade on a commodities exchange. The profitability of a natural gas ETF is, thusly, dependent on the overall price bearing of natural gas, in view of the trading that happens on the commodities exchange.
The price of natural gas rises and falls as per vacillations in supply and demand.
Limitations of Natural Gas ETFs
Since natural gas ETFs hold futures contracts, they are presented to a special type of risk called contango. Every month, the manager of the natural gas ETF needs to purchase new futures contracts to replace the old contracts that terminate. The new contracts will quite often have marginally higher prices than the old ones, implying that each time contracts are replaced, extra costs are incurred by the fund manager. Over the long run, these small costs can amount to make a large drag on the fund's overall performance.
Therefore, investors will generally try not to depend on natural gas ETFs as a type of long-term investment vehicle. As a result of contango risk, an investor could cause tremendous costs from the continuous turn over of futures contracts, implying that even assuming natural gas prices truly do rise over their investment period, they probably won't rise to the point of making the overall investment profitable.
Most investors seeking exposure, in this way, utilize natural gas ETFs chiefly as a short-term trading vehicle, with the goal that the costs of contango don't sufficiently collect to have a significant impact.
There are three natural gas ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as of Aug. 2021.
Illustration of a Natural Gas ETF
One illustration of a widely traded natural gas ETF is the United States Natural Gas Fund. This fund is principally made out of natural gas futures contracts that are set to terminate inside the next month and trades on the New York Mercantile Exchange (NYMEX) as UNG. Its goal is to mirror the daily changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, a natural gas pipeline that fills in as the official delivery location for futures contracts on the NYMEX.
The United States Natural Gas Fund is extremely sensitive to variances in natural gas prices, so investors need to watch market prices closely to try to yield a profit. Throughout recent years, natural gas prices have gone between a high of $20, arrived at in the Fall of 2005, to just under $1.7, arrived at in September of 2020.
Highlights
- Natural gas prices have been rising off supply shortages and the easing of lockdown limitations, having recently hit 30-year lows in 2020.
- They are structured as commodity pools that hold natural gas futures contracts.
- Natural gas ETFs are investment vehicles that give exposure to natural gas prices.
