United States Natural Gas Fund (UNG) review
The United States Natural Gas Fund is the largest natural gas commodity based energy ETF in the world. Opened in April of 2007, it has become one of the most popular natural gas ETFs. Read on to find on why.
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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