The Worst ETF Ever?

Imagine investing in an ETF that gained 35% last year, and is up 85%, this year, but still be down over 98% from your initial investment. 

Well, that’s exactly what is happening to its day one investors, as you’re about to discover.

This ETF claims to track one of the hottest commodities in the market. But as you’ll find out shortly, it fails to deliver. 

That’s why it’s so important to always read the fine print. 

Although it’s the top search amongst oil and gas commodity ETFs amongst financial pros, this isn’t a ETF you want to own long-term.

Here’s everything you need to know about the United States Natural Gas Fund ETF (UNG).  

United States Natural Gas Fund ETF (UNG) 

United States Natural Gas Fund ETF (UNG) is designed to track in percentage terms the movements of natural gas prices. Specifically, reflecting the daily changes in the benchmark futures contract on natural gas as traded on the NYMEX.

In other words, UNG gives investors commodity exposure without having to open a futures account. 

It has over $553 million in total net assets making it one of the largest commodity ETFs out there.

Now, make no mistake about it, UNG is one of the best ETF performers in 2022, gaining more than 85%. But over the last ten years, it has been a terrible investment. 

In 2012 it declined 26.8%, in 2014 it dropped 28.6%, in 2015 it collapsed by 41.3%, in 2017 it dropped 37.5%, in 2019 it sold off by 31.7%, and in 2020 it fell -45.4%. 

A $10K investment 10 years ago is now worth $2,256. 

But is that the ETFs fault? After all, it is meant to track natural gas futures. 

Let’s see how accurate it’s been.

If you take a look at the comparison, NG futures being represented by the candlesticks, and UNG by the line chart, you can see that UNG has drastically underperformed since inception. 

In fact, if you invested $10K in UNG when it first started trading, it would be worth less than $200. 

How is this possible?

You see, UNG invests in near-term futures contracts, and is consistently selling them before expiration, and rolling them into a new contract. But here’s the thing. Commodities typically trade in contango. 

That means the further dated contracts are priced higher than the near-dated contracts. 

By rolling the positions, UNG is selling cheaper futures contracts and buying more expensive contracts. 

Take this year, for example, natural gas futures are up 101%, but UNG is up 85%. 

And because of this constant rolling of futures, the relationship between natural gas futures and UNG falls apart over time, making a poor investment for those trying to gain natural gas exposure. 

Trading UNG

While investing in UNG is a poor idea, that doesn’t mean it’s not good for swing and day trading. 

What we like about it is that you can trade options on it, and it’s shortable. Oh, and it’s also actively traded, with more than 3.1 million shares changing hands daily. 

Investing In UNG

This is a disaster ETF for long-term holding. Not only have day one investors lost nearly everything, but the ETF also doesn’t offer any incentives like dividends to make shareholders happy.

To make matters worse, it charges a 1.35% expense ratio.  

Our Opinion – 1/10

UNG has been one of the best performing ETFs in 2022, however, it has one of the worst long-term track records for an ETF. 

And that’s because of the consistent rolling of futures contracts (selling cheap and buying more expensive) it does. 

While it makes for an awful investment, that doesn’t mean you shouldn’t have it on your radar. 

It remains one of the best ways equity traders can gain exposure to natural gas without trading futures. But that’s it, it’s only good for short-term trading. 

If you like money, then you’ll want to stay far away from UNG.

Instead, you’re better off going with broad based exploration and drilling ETFs like the XOP.