Natural gas exchange-traded funds (ETFs) provide investors with exposure to natural gas prices while avoiding both the complexities of trading natural gas futures contracts and the storage costs of holding physical commodities. Natural gas is a commodity used as a source of energy for heating, cooking, fuel, and electricity generation. It also is used in the manufacture of plastics and other organic chemicals. The price of natural gas rises and falls according to fluctuations in supply and demand.
Key Takeaways
- Natural gas futures prices have risen at a faster pace than the S&P 500 over the past year.
- The three natural gas exchange-traded funds (ETFs), ranked by one-year trailing total returns, are UNL, UNG, and GAZ.
- All three of these ETFs hold natural gas futures contracts to gain exposure to natural gas prices.
There are three natural gas ETFs that trade in the U.S., excluding inverse and leveraged ETFs. All three primarily gain exposure to natural gas prices through natural gas futures contracts and do not hold stocks of natural gas companies.
Natural gas futures prices, as measured by the Bloomberg Natural Gas Subindex, have risen at a faster pace than the broader market over the past 12 months. The index has risen 125.2% compared with the S&P 500’s total return of -3.0% as of Aug. 16, 2022. Russia’s invasion of Ukraine, which began in late February, has been a key driver of rising natural gas prices in recent months. Russia is a major exporter of natural gas. The best-performing natural gas ETF, based on performance over the past year, is the United States 12 Month Natural Gas Fund (UNL).
We examine the three natural gas ETFs below. All numbers below are as of Aug. 16, 2022. In order to focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
Exchange-traded funds (ETFs) with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs, which can negate some of your investment gains or increase your losses.
- Performance Over One Year: 147.6%
- Expense Ratio: 0.90%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 100,589
- Assets Under Management: $41.1 million
- Inception Date: Nov. 18, 2009
- Issuer: Marygold Cos, Inc.
UNL is structured as a commodity pool, a private investment structure that pools investor contributions in order to trade futures and options in commodities. The fund holds natural gas futures contracts to gain long exposure to natural gas prices and diversifies its holdings across multiple maturities to mitigate the adverse impact of contango. UNL may also invest in forward contracts and swap contracts. UNL’s benchmark is the near-month futures contract set to expire and the contracts for the following 11 months, for a total of 12 consecutive months. UNL may be appealing to investors as a hedge against inflation.
- Performance Over One Year: 133.0%
- Expense Ratio: 1.11%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 7,121,375
- Assets Under Management: $550.6 million
- Inception Date: April 18, 2007
- Issuer: Marygold Cos, Inc.
Like UNL, UNG is structured as a commodity pool, offering exposure to natural gas prices by holding natural gas futures contracts. The fund provides exposure to natural gas prices by holding natural gas futures contracts. UNG aims to replicate the percent change on a daily basis of the price of natural gas delivered at the Henry Hub, Louisiana. It invests in front month futures contracts, meaning the futures contracts with the nearest expiration dates. This means the fund is more exposed to the adverse impacts of contango and is thus more appropriate for traders with a short-term strategy. It may also be appealing as an inflation hedge.
- Performance Over One Year: 125.1%
- Expense Ratio: 0.45%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 25,977
- Assets Under Management: $32.2 million
- Inception Date: March 8, 2017
- Issuer: Barclays Capital
GAZ is structured as an exchange-traded note (ETN), a type of unsecured debt security that does not make interest payments and has stock-like characteristics. The fund is designed to provide exposure to the Bloomberg Natural Gas Subindex Total Return index, which comprises futures contracts. As an ETN, GAZ exposes investors to the credit risk of the issuer. Also, this ETN doesn’t generally move with changes in spot natural gas prices because the underlying index is composed of futures contracts. It is designed for investors with a short-term investment horizon, rather than as part of a buy-and-hold strategy.
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