The Worst Way to Invest in Natural Gas is Also The Best

Imagine investing in an ETF that naturally loses money over time.

Doesn’t sound like a great place to park your money, does it?

Yet, the U.S. Natural Gas Fund (UNG) is a hugely popular natural gas ETF amongst financial pros.

In fact, it’s become the third most searched ETF by financial pros over the last 30 days.

While it might be enticing to play a volatile ticker that rises and falls like a roller coaster, it’s important you understand what you’re getting into.

Because if you do, then it’s the best one out there.

Key Facts About UNG

• Net assets: $1.04 billion
• 12-month trailing yield: N/A
• Inception: April 18, 2007
• Expense ratio: 1.11%
• Number of holdings: N/A

UNG is the most popular natural gas ETF out there offering direct exposure to the price of the underlying commodity.

Rather than hold actual natural gas, the ETF owns front-month futures contracts. 

To give you an idea of what that looks like, here is a list of the holdings as of 5/31/2023:

Source: USCF Investments

The fund holds futures, swaps, and cash as it manages the ETF.

Performance

Because the fund uses futures on a hard commodity, it suffers from Contango.

This is a condition where the futures contracts with longer-dated expirations cost more than nearer-dated ones.

So, when expiration date comes up, the fund sells the current month futures at one price and buys the next month futures at a higher price.

Over time, this leads to a loss of asset value all things being equal.

Source: ETF.com

This erosion problem exists in every energy ETF that provides direct exposure to the underlying asset’s price.

So, while these can be used for short-term trading, they are not meant to be held as investments.

Competition

If you’re looking for other ways to play natural gas prices, there are a few options other there:

• ProShares Ultra Bloomberg Natural Gas (BOIL): Delivers 2x the daily performance of natural gas.
• ProShares UltraShort Bloomberg Natural Gas (KOLD): Looking to bet against natural gas? KOLD is the opposite of BOIL with 2x the inverse daily performance of natural gas.
• iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ): A slightly different take than UNG, GAZ is an ETN rather than an ETF. Thus, it holds no futures and is instead a promissory note issued by the financial institution.

The last ETF, GAZ, is unique because of its structure. ETNs aren’t actually ETFs. They’re debt instruments that track the underlying asset. While the expense ratio is lower, the ETN still suffers from erosion. And now you get the added risk of the institution going belly up.

Our Opinion 10/10 or 0/10

Ok, so here’s the thing. If you understand what this instrument is and all the risks, the UNG is the best of the bunch. For that, we’d give it a 10/10.

But, as far as investing in energy, it’s a big 0/10. Instead, we’d recommend an ETF that invests in energy companies like the XLE.