Natural gas futures have a direct influence on natural gas prices. The benefit to this is that there is transparency in the price of natural gas. Anyone can turn on CNBC, pick up the Wall Street Journal or look for the price online. No longer are natural gas prices shrouded in secrecy.

So what can we do with this information? You can invest in natural gas in several ways. One way is to trade the natural gas futures on the New York Mercantile Exchange. This is the largest natural gas futures contract in the world. This contract is called the Henry Hub natural gas contract since it is based on delivery of gas to the Henry Hub gas processing plant located in Louisiana. This futures market was opened in 1990, and natural gas futures options were introduced in 1992 as a further way of hedging natural gas prices.

Natural gas contracts are traded 2 ways. First is the open outcry way. This is where your order is directed to the trading floor and executed in the natural gas pit. These are the people you have seen in movies like Trading Places and on TV jumping and screaming at each other to make a trade.

You can also choose to execute your trades electronically. Here you will select a price on your computer at which to trade. Since open outcry and the electronic trade off of each other, the prices will be the same.

You would need to open a futures or commodity account with a broker. You can find many of them online. You will need see how much money you will need to open an account, what their margin requirements are and how much they will charge per trade. Not all futures brokers charge the same commission. You will need to check commission prices and the level of service they will offer you. Do you prefer to do your own research or do you want to be guided by the broker?

If you do decide to trade off a screen, you will then have to invest in a fast computer and a high-speed cable connection. You don’t want to be left in the dust by faster traders. You will also have to choose which trading platform and charting software you want to use too.

Another way to trade natural gas futures is to invest in a natural gas ETF (exchange traded fund). One of the most popular natural gas ETFs is the United States Natural Gas Fund (ticker symbol UNG). This gas ETF purchases the front month futures contract on the NYMEX. When the front month is within 2 weeks of expiration, they will then “roll” the contract into the next month. This means they will sell their position in the front month and at the same time purchase the next month contract so you are always “long” the market.

What if you think the price of natural gas is going down? How can you profit from that? Once again you can trade a natural gas ETF that is based on the movement of the futures contract. The Horizons BetaPro Natural Gas Bear Plus ETF sells or gets “short”’ the front month natural gas futures. This ETF also “rolls” its contracts forward near expiration so you will always be short the natural gas market.

Now you know how natural gas prices are set and how you can profit from them.

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Here is a list and some background on some of the most popular Natural Gas ETF that are available for you to trade.

• The United States Natural Gas Fund, LP (UNG)

The United States Natural Gas Fund is an exchange traded fund that seeks to track (percentage wise) the price movements of natural gas prices. UNG units are bought and sold on the New York Stock Exchange.

The investment objective of UNG is for changes in the percentage terms of the units net asset value (nav) based on the natural gas prices as trade on the New York Mercantile Exchange. The price is based on the near month contract that’s set to expire, except when the near month contract is within 2 weeks of the expiration of the contract. At that point the natural gas futures contract will be “rolled” over into the next contract month.

• First Trust ISE-Revere Natural Gas Index Fund (FCG)

The investment objective for First Trust ISE-Revere Natural Gas Index Fund (FCG) is to seek returns that correspond to the price and yield (before expenses) of the equity called the ISE- Revere Natural Gas Index ™.

The ISE- Revere Natural Gas Index ™. Is an equal-weighted index made up of exchange-listed companies that derive a substantial portion of the income form the exploration and production of natural gas. The index is constructed based on the total population of stocks listed in the United States of companies involved in the production and exploration of natural gas. Stocks of companies whose natural gas reserves do not meet certain requirements are not included in the index. Stocks are then ranked using four different methods. These methods include Price/Earning ratio, Price/Book ratio, Return on Equity and to correlation to natural gas futures prices. The rankings are then averaged and the top 30 stocks based on final rank are then selected for the index. The index is then rebalanced on a quarterly basis.

• SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

The SPDR S&P Oil & Gas Exploration & Production ETF seeks to reproduce as closely as possible the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. This index represents the oil and gas exploration and production sub-industry portion of the S&P Total Market Index. The S&P Total Market Index tracks all the United States common stocks listed on the NYSE, AMEX, NASDAQ National Market and the NASDAQ Small Cap exchanges. The Index is an equal-weighted market cap index. The Fund attempts to approximate the investment performance of the index, by investing in a portfolio of stocks intended to replicate the index.

These are 3 of the most popular Natural Gas ETF to trade. Here are a few more you should research:

IShares Dow Jones US Oil & Gas Exploration ETF (IEO)

SPDR S&P Oil & Gas Equipment & Services ETF (XES)

PowerShares Dynamic Oil & Gas Services Portfolio (PXJ)

ProShares UltraShort Oil & Gas (DUG

ProShares Ultra Oil & Gas (DIG)

Your research has now started. Go find the right investment for you.

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• United States Natural Gas Fund (UNG) review

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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• Want to trade the Natural Gas ETF? Here are some to consider.

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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Why would I purchase a Natural Gas ETF when I can buy a natural gas index mutual fund?

You certainly can buy a gas mutual fund from a fund family. But the annual management fees of doing so will be more expensive than the management fees of an ETF. Plus if you trade a natural gas index fund, you will only be able to buy and sell at the closing price at the end of the day. What if some news come out that you think will cause natural gas prices to rally? If you buy an index fund, most of the move will be made that day while you’re sitting on the side waiting to buy at the end of the day. Better to be able to react immediately and buy instead of watching other people make money.

Can Natural Gas ETF beat the market?

Natural Gas ETF provide an easy way for an investor to trade various segments of natural gas. There are gas ETFs that mirror the natural gas futures market and there are Natural Gas ETFs that attempt to follow the prices of various gas exploration companies for example. Those ETFs take a basket of stocks to give you diversified holdings in natural gas.

How and where do I buy them?

You can buy or sell them as you would any stock at your brokerage firm. Don’t have an account to trade stock? You can visit Sharebuilder and buy ETFs for $4 to open an account with as little as $0. Thats right, there is NO minimum amount to open an account. Visit the site for more  details.

ETF’s are they insured?

ETF’s are tightly regulated by the Securities and Exchange Commission (also known as the S.E.C.) The S.E.C. examines each ETF that is created and brought to market. The Depository Trust Clearing Corporation is in charge of the clearing of trades. Their job is to ensure that the stock certificates involved in each trade settle in the proper stock account each night.

As in any stock, there are underlying risks involved. That is up to you the trader if the risk profile matches yours. You are ultimately responsible for your trading decisions.

Why not just buy individual Natural Gas Stocks?

You can, but most investors prefer to be diversified when they invest. Depending on the size of your investment portfolio, you will not get the diversification that you need. You may be only to purchase a few stocks but with a Natural Gas ETF you can buy several for the same amount of investment. Plus if you traded say the United States Natural Gas Fund, you get to trade NYMEX natural gas futures without opening a futures account or exposing yourself to that much more risk. You could buy a few shares instead of having to put up the margin to trade the natural gas futures.

Are there ETFs for Propane?

Despite the demand and usage of propane gas, there are currently no propane gas ETFs at the present time.

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You may read in the paper or hear on the news about the wild price swings in natural gas. Some may view it has highly risky while others see it as a tremendous opportunity to profit. Which type of investor are you?

There are several ways to trade natural gas. I find the easiest way is by using the Natural Gas ETF. Why? There are several types of Natural Gas ETFs to use depending on your outlook and risk tolerance.

If you want to trade natural gas futures, there is an ETF for that. Instead of opening a futures account and hoping to qualify for a futures account, you can easily trade the United States Natural Gas Fund. By buying a few shares of the fund, it allows you to mirror the price movements of the natural gas futures on the New York Mercantile Exchange.

You also have to ask yourself how do you trade? Do trade technicals or fundamentals or perhaps a little of both.

A technical trader is one who uses price charts. The technician or chartist tries to see patterns in past price movement to predict the future prices of natural gas. Some use short-term charts like a 5-minute chart or a 30-minute chart. Others may only use a daily chart to track prices. Still other like a longer term view and look at weekly and monthly charts. If you look at 5 or 30-minute charts, you are generally a day trader. You are trading hoping to scalp a few dollars here and there. This can be less risky since your positions are only for a few minutes. You don’t have to fear about a war starting overnight or a refinery fire effecting prices. These are usually quick swift trades.

Trading with a longer time frame can yield great returns (witness someone like Warren Buffet) but position trading takes a lot of patience to trade. You must be able to sit tight and not get faked out of your position. Be prepared to be in the trade for the long haul.

A fundamental trader is one who trades based on the underlying supply and demand of natural gas. This trader stays on top of the number of rigs being used to drill for natural gas. He will also have an eye out on the weather and follow the weekly natural gas storage report that the government put out each week. This trader isn’t really concerned about the ‘squiggly” line of a price chart. He determines his trading position on supply and demand.

Hopefully this article help you decide the kind of trader you want to be.

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