These proposals have been in the works for a few months. These new rules may only effect a few of the commodity based ETFs offered to investors.

The United States Natural Gas ETF is a fund that invests in natural gas futures. This is accomplished by primarily purchasing futures contracts on the New York Mercantile Exchange. Since this is a long only fund, it only purchases future contracts and doesn’t hedge the position.

This wasn’t a problem when the fund first started out, but as it has grown in popularity, its size is becoming to big for the futures market to handle. That is when the CFTC first stepped in.

The CFTC first examine the fund over the summer. Concerns were raised about UNG exceeding the position limits set forth by the CFTC. For a brief time during the summer, the United States Natural Gas ETF wasn’t allowed to create new shares for investors. This move then created a premium to the net asset value of the fund. The CFTC then allowed UNG to issue more shares and the premium went down.

To ease the pressure on the natural gas futures markets, UNG has moved into other areas to invest in natural gas. One place they have traded is on the IntercontinentalExchange (ICE). They trade a natural gas futures contract based on the NYMEX contract. UNG has also moved to trade swaps and over the counter products. By doing this, there is less risk to the fund to exceed the futures position limits set by the CFTC.

The United States Natural Gas ETF has sought ways to get around the position limits. The CFTC grants exemptions to position limits in certain ways. Position limits can be exceeded if used for hedging for example. This is a legal way to increase their position to meet the demand of investors wanting to buy into a natural gas ETF.

The CFTC has moved into this because of the run up in energy prices during the summer of 2008. The CFTC is trying to determine why prices spiked that summer. Was it due to speculation or was the worldwide demand for energy that great?

Even with this attention, today’s investor should look into natural gas ETFs if they want to invest in the energy market.

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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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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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