The United States Natural Gas Fund is a very simple fund to understand. According to their prospectus, the objective of the UNG fund is mirror the daily percentage move of the natural gas futures traded on the New York Mercantile Exchange. The futures price is for natural gas delivered at the Henry Hub in Louisiana. The price is based on the near month’s future, but when the near month is within 2 weeks of expiration, then the contracts are “rolled” into the next futures contract month. This sets the price, minus the funds expenses.

Natural gas futures on NYMEX are a very active market and are the benchmark for natural gas prices here in the United States. The fund doesn’t use leverage. It attempts to match the daily return of the futures price. The advantage of trading UNG is that it gives you commodity exposure without having to open up a commodity account.

Keep in mind that this is a long only fund. This fund will only purchase natural gas futures. So if you are bullish of natural gas, this may be the fund for you to trade.

This fund is fully marginable through your brokerage firm. You can trade this like a stock. This means you are able to enter market, limit, stop and stop limit orders. You are also able to place GTC (good ‘til canceled) orders as well. The UNG is also optionable. This enables you to buy/sell and write options on UNG. It is also possible to “short” UNG. This is something you would need to set up with your stock brokerage account.

At one point this year, UNG had become so large that the SEC had to step in and prevent UNG from issuing more shares. The fund was becoming too large for the natural gas markets to handle. The SEC has since allowed UNG to issue more shares. To prevent problems like that in the futures, UNG will also be trading natural gas on the Intercontinental Exchange (ICE) and participating in natural gas swaps.

Something else you should keep in mind. Each month UNG must roll the futures contract into the next months contract. Depending on the price relationship, this can cause the markets to be in contango or backwardation. Contango is when the front contract is priced lower than the next month. If the front month contract is $5 and the next month is priced at $6, this will have an effect on the NAV of the fund. This is because you now have to pay more to roll the contracts and to stay long.

Backwardation would be the opposite. If the front month is $6 and the next month is $5, then you would be selling higher and buying lower and that would help your total return.

The natural gas market is currently in contango, so you should keep that in mind when you trade UNG.

As stated at the beginning of this article, this is the most popular natural gas commodity ETF, but there are some things to consider before investing in it. Read more then make a decision if this is the right Natural Gas ETF to invest in.

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There are several ways to trade the natural gas market. One way to invest is by using a natural gas index fund. Another way is to trade the natural gas futures on the New York Mercantile Exchange or on the Intercontinental Exchange. Still another way is to purchase various natural gas stocks.

I’ve found that the best way to trade this market is to use a Natural Gas ETF. What is an ETF? ETF stands for Exchange Traded Funds. ETF are traded just like stock. You trade them through your stock broker. You can put them in an IRA or a SEP-IRA. You can buy them or even trade them short. They are fully marginable. Some Natural Gas ETFs even pay dividends.

Why Natural Gas ETF?

There are many different types of Natural Gas ETFs you can trade depending on your view of the market. There is an ETF that’s based on the movement of prices of NYMEX natural gas futures. There are ETFs that invest in natural gas drillers, exploration and suppliers. You see you have many choices on how to invest in Natural Gas.

ETFs are more transparent then mutual funds.

Have you ever tried to see exactly what stocks are in your mutual fund? Trying to get that information from your mutual fund advisor is tough. They often only publish it at the end of the quarter. And frequently they are involved in what is called “window dressing” They will buy some of the hot stocks that quarter at the end of the quarter to show you “hey we have this stock” Not so with Natural Gas ETFs. You know exactly what stocks are in your ETF. You know exactly how many contracts the Natural Gas futures ETF has EVERYDAY.

Natural Gas ETFs are less volatile than individual stocks.

If you invest in an individual natural gas stock, you are subject to possible bad news coming out about the company. Maybe one of their gas fields is having problems. Are you able to pick out the best natural gas stock to trade? With an ETF you will have a basket of stocks to help guard against any one stock from destroying your portfolio.

You can trade Natural Gas ETFs all day

When you trade a natural gas index mutual fund, what is the ONLY price you can get for it? The answer is the closing price of the day. There is no way to trade a mutual fund intraday. You’re at the mercy off buying or selling at the final price of the day. By trading a natural gas ETF, you can trade it intraday. You are free to try and “scalp” the market, react to news during the day. You can set price points to trade around during the day with an ETF. An index mutual fund does allow that.

Think the price of Natural Gas is going down? You can Short Natural Gas ETFs

That’s right. Do you think demand will be low this winter? Maybe this will be a warmer winter and you expect the price of natural gas to go down. You are able to short (sell) Natural Gas ETFs betting on the price of natural gas to go down. You’re not able to do that with mutual funds.

Add Natural Gas ETFs to balance your portfolio

With the current economic situation, with the possibility of inflation coming back, you can add a natural gas ETF to you portfolio as a hedge against inflation.

Natural Gas ETFs can be charted and analyzed using technical analysis.

Do you like to use price charts to trade the markets? Perhaps using moving average crossovers or Bollinger bands to discover a new trend. Since Natural Gas ETFs trade like a stock, you can use your favorite charting tools to trade the ETF.

Now you have learned the benefits of using the various Natural Gas ETFs that are available. Do a little more research and start trading now!

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The US Energy Information Association states that the use of natural gas is projected to increase over 60 percent over the next 20 years. Natural gas should be in huge demand for providing power to the electric power sector.

One way to trade energy is to trade the Natural Gas ETF. What is a Natural Gas ETF? An ETF is similar in a way in which you trade stocks. With a Natural Gas ETF, you can buy it on margin and trade through your regular stock account. You can also trade them in your IRA and SEP-IRA accounts.

But isn’t Natural Gas traded as a commodity or futures, and isn’t that risky? True you can trade natural gas in the futures market, but that means opening up a separate trading account and constantly looking for price updates. Also when trading futures you can be exposed to wild price swings and be subject to margin calls.

The Natural Gas ETF is traded just like stock. If you already have a stock account, it as simple as deciding which etf to invest in. In fact you can open a stock account at sharebuilder.com and trade ETFs stocks for $4.

There are several types of Natural Gas ETFs. One way is a pure futures play like the United States Natural gas fund (UNG). This fund purchases near month natural gas futures on the New York Mercantile Exchange. When the near month contract is set to expire, the fund then “rolls” the holdings into the next month contract. This happens each month since there are natural gas future contracts for each month.

You can also invest in natural gas exploration like the SPDR S&P Oil & Gas Exploration & Production ETF and the Dow Jones US Oil and Gas Exploration & Production. These ETFs purchase baskets of stocks that are involved in the exploration and production of natural gas. For example the SPDR S&P Oil and Gas Exploration and Production fund has included stocks such as Exxon-Mobile, Chevron, Devon Energy and Conocophillips in the past and may in the future.  Check the latest holding statements in those ETF’s to see their current holdings

There is also an equipment and service natural gas ETF.  The SPDR S&P Oil & Gas Equipment & Services ETF tracks an index of oil and gas equipment and services companies. Some of the stocks in that ETF were Atwood Oceanic Inc.,BJ Services Co. and Dril Quip Inc.

Trading natural gas is very easy to do. As long as you have a stock trading account, you can begin to the Natural Gas ETF.

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• Why you should trade the Natural Gas ETF over futures and index funds.