Run Away From This Nat Gas ETF Before it Explodes

Financial pros searched out ProShares Ultra Bloomberg Natural Gas ETF (BOIL) more than any other commodity ETF in the past month.

It makes sense given the extreme volatility in the energy commodity.

But if profits were based on popularity, then the world would be run by prom kings and queens.

Average investors don’t have a direct way to invest in crude oil or natural gas without taking it on the chin.

BOIL is no exception. And as a leveraged natural gas ETF, it hoses investors two different ways.

Key Facts About SMH

• Net assets: $900 million
• 12-month trailing yield: N/A
• Inception: October 4, 2011
• Expense ratio: 1.33%
• Number of holdings: N/A

Unlike gold, there’s no warehouse full of natural gas that you can own a piece of.

The closest we get is through futures contracts or some other natural gas derivative.

BOIL is precisely that – an ETF tied to natural gas futures. 

It tracks 200% of the performance of the daily price move in natural gas.

Source: ProShares

Like options contracts, you typically pay a premium to own a futures contract. This premium erodes over time until expiration.

At that point, you roll the contract to the next expiration date, which means paying another premium.

So, even if the price of natural gas goes nowhere over time, you lose money.

Additionally, with a leveraged ETF, you can get mathematical erosion as well.

For example. Let’s say Natural Gas goes from $1.00 to $1.10, a 10% jump.

BOIL would go from $1.00 to $1.20, since its leveraged.

Now let’s say Natural Gas drops back to $1.00, a roughly 9% decline.

BOIL would drop 18% to $0.98.

Over time, this also eats away at your investment principal.

Performance

Consequently, the long-term performance of this ETF is downright terrible.

Source: ProShares

Only when you hold the ETF for days or weeks is it possible to turn a profit. Anything close to a year crushes you unless you just happen to pick up a super bull market in natural gas.

Competition

We wanted to drive the point home by compared BOIL with two other natural gas commodity ETFs and two ETFs that invest in energy companies.

• ProShares UltraShort Bloomberg Natural Gas (KOLD): The opposite of BOIL, KOLD tracks 2x the inverse daily move in natural gas prices.
• United States Natural Gas Fund (UNG): UNG is the plane Jane version, tracking the daily movement of natural gas prices with no leverage.
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP): Oil & Gas exploration companies live and die by the price of oil and natural gas. The XOP holds a basket of the largest companies that play in this part of the energy market.
• Energy Select Sector SPDR Fund (XLE): A broader energy play, the XLE invests in a select set of energy companies that make money on all aspects of the energy supply chain, from exploration to transportation to marketing.

The table below says it all. The leveraged ETFs are absolute garbage over a multi-year period, while the ones that own companies participating in the energy sector do just fine.

Our Opinion 0/10 

Investing in BOIL is like opening up a propane tank full throttle and lighting a match – it doesn’t end well.

Don’t invest in commodity ETFs, especially leveraged ones.

If you want exposure to energy, do it through the companies or ETFs of companies that operate in the sector.