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Exchange Traded Funds are useful instruments that can do wonders for your portfolio. ETFs can lower your expense costs, reduce diversification risk and allow you to access previously inaccessible markets. They can even lower your taxes when compared to mutual funds.
But one thing ETFs can't seem to do is track energy prices. ETFs that invest in energy futures have had a terrible time this year as a market condition known as contango has eaten away their returns. The United States Oil Fund (USO) is up 16% ytd, while crude oil itself is up over 50%. This massive underperformance is no secret and no fluke; it's the inevitable result of the investment strategy listed in USO's prospectus. But many investors who thought they were buying a fund that tracked crude oil have been burned.
Now with natural gas prices set to rise, investors are rushing into the USO's sister fund - the United States Natural Gas Fund (UNG). But the UNG seems to have even more problems tracking the price of its target commodity. Meanwhile, concern is growing that both funds now have undue influence on their markets and they could face regulatory pressure in the future.
Although ETFs which invest in futures can be useful, a safer and potentially more lucrative strategy exists: investing in a broadly diversified ETF which holds shares in commodity producers. For natural gas the relevant fund is the First Trust ISE/Revere Natural Gas Index Fund (FCG).
This fund has stakes in major natural gas names like Devon Energy (DVN), Quicksilver Resources (KWK), and Newfield Exploration (NFX). It's up 22% this year, while the UNG is down 33%. It carries an identical .60% expense ratio, and isn't affected by problems in the futures market. Although the FCG is thinly traded, it shouldn't be. Natural gas prices are well below their historical average, and the FCG is trading at barely 7 times earnings.
Disclosure: None
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This article has 33 comments:
Example: In the past week, NG has gone from roughly 3.75 to 4.30 (an increase of 14%) while FCG has gone from 14.83 to 14.17 ( a decrease of 4.5%). Tracks the markets rather than the underlying commodity - if I want that, I'll buy SPY.
On Jun 17 08:14 AM MadScientist wrote:
> I bought this one recently, and I must admit I am not overwhelmed.
> It is less influenced by the price of NG than it is by the overall
> market performance.
>
> Example: In the past week, NG has gone from roughly 3.75 to 4.30
> (an increase of 14%) while FCG has gone from 14.83 to 14.17 ( a decrease
> of 4.5%). Tracks the markets rather than the underlying commodity
> - if I want that, I'll buy SPY.
to buy today FCG puts you at risk of a downside in the market which to my opinion is very likely looking at technical analisys. I prefer HNU.TO (double exposure to NG) or other leveraged funds available in europe - best luck to all - NG anyway should rise at least to 20 soon..
This is the same issue that I see with GDX versus GLD - if the market tanks, GDX will suffer while the price of gold will rise significantly.
The companies that FCG is tracking are largely up due to overall market conditions and also the strong moving oil commodity (the rising tide lifts all ships). Honestly, the "market" does a terrible job of separating "oil" companies from "natural gas" companies. When oil rises, the majority of "energy" companies rise regardless of their oil/natural gas production ratio.
Furthermore, as pointed out above by another poster, it isn't tracking natural gas at all (natural gas up 14%, FCG down 4%).
If you want an ETF to track "energy" companies, FCG may be a good pick. But to insinuate that FCG is a good "natural gas" tracking ETF is completely bogus.
In the long run, it is impossible to refute that natural gas producers benefit from a rising natural gas price.
Yes, the FCG is not for traders. Its not for speculators. Its for INVESTORS.
How do you defend your statement in light of these facts?
On Jun 17 08:18 AM drooyrich wrote:
> I do not agree - companies have been rising because of the stock
> market rebound, not because of better tracking of NG - furthermore,
>
> to buy today FCG puts you at risk of a downside in the market which
> to my opinion is very likely looking at technical analisys. I prefer
> HNU.TO (double exposure to NG) or other leveraged funds available
> in europe - best luck to all - NG anyway should rise at least to
> 20 soon..
Nymex closing price for natural gas:
Jan 09 - $6.14
Feb 09 - $4.48
Mar 09 - $4.06
Apr 09 - $3.63
May 09 -$3.32
Jun 09 - $3.54
From Jan through June, the closing price has lost 42% while FCG is up over 20% in the same time frame.
FCG =/= tracking natural gas futures
FCG = tracking energy companies
Why is the S&P rallying in the middle of the worst decline in economic output since the Great Depression ?
Again...my argument isn't that the FCG tracks the futures market better than the UNG, just that its a better investment.
When you buy the UNG you literally throw money out the window on negative rollovers.
But go ahead...waste it if you like.
And yes if the market tanks, and energy prices rise, energy stocks will outperform.
On Jun 17 10:10 AM skrangeo wrote:
> How do you defend this article (looking at YOU, ETF Grind) when these
> are the FACTS:
>
> Nymex closing price for natural gas:
>
> Jan 09 - $6.14
> Feb 09 - $4.48
> Mar 09 - $4.06
> Apr 09 - $3.63
> May 09 -$3.32
> Jun 09 - $3.54
>
> From Jan through June, the closing price has lost 42% while FCG is
> up over 20% in the same time frame.
>
>
> FCG =/= tracking natural gas futures
>
> FCG = tracking energy companies
On Jun 17 10:13 AM Phillip S wrote:
> Isn't this the REVERSE of natural gas? Natural gas goes UP, FCG
> goes DOWN? Right?
let's look at the article's headline: "FCG: A better natural gas ETF"
natural gas down 42% on the year. UNG (ETF) and GAZ (ENT) are both down a little over 40%. correlation: pretty strong
natural gas down 42% on the year. FCG up 20%. correlation: none
fllllammmmming POO
FCG correlates quite well in 2009 vs. USO and has zero correlation to UNG/GAZ (which have tracked the actual natural gas index relatively well)
And nowhere in the article do I claim that the FCG CORRELATES better than the UNG.
Its a better INVESTMENT. In the long run it will benefit from rising natural gas prices.
If you want coorelation, but the actual futures.
ARE YOU SAYING THE GDX IS A BAD WAY TO PLAY GOLD?
Is that what you're saying? Because that doesn't correlate with the gold price either, but HUGE positions are held in the GDX by INVESTORS who know that in the long run it will benefit from a rising gold price.
On Jun 17 10:23 AM skrangeo wrote:
> Basically, this article is a pile of flaming poo.
>
> let's look at the article's headline: "FCG: A better natural gas
> ETF"
>
> natural gas down 42% on the year. UNG (seekingalpha.com/symbo...)
> and GAZ (seekingalpha.com/symbo...) are both down a little
> over 40%. correlation: pretty strong
>
> natural gas down 42% on the year. FCG up 20%. correlation: none
>
>
> fllllammmmming POO
Again, I don't think you understand with the FCG is. Its an EQUITY etf. It invests in stocks. Commodity stocks are known to go up and down in the short term, but in the long run they reflect the price of the underlying commodity. Not perfectly - sometimes not even well. But better than an futures ETF in contango!!!
Did anyone click on the links to check this thing out. Its not me who's saying it, its the Financial Times: ftalphaville.ft.com/bl.../
On Jun 17 10:26 AM skrangeo wrote:
> ETF Grind, please post a chart of USO vs. FCG vs. UNG vs. GAZ
>
> FCG correlates quite well in 2009 vs. USO and has zero correlation
> to UNG/GAZ (which have tracked the actual natural gas index relatively
> well)
Yes the USO and the UNG coorelate well ON THE DOWNSIDE.
They don't coorelate well on the UPSIDE, which is why they suck.
Read this article on Seeking Alpha: "USO: All of the Drops, and Only Some of the Gains"
seekingalpha.com/artic...
I thought the article was pretty clear that the FCG was an equity fund.
It's still a good investment to make as natural gas prices rise. Higher natgas prices > higher earnings > higher share price.
This investment advice is kinda like saying buy Exxon when oil prices rise. I don't know what's so "pooey" about that.
And today UNG is up almost 1% and FCG is down more than 4.5%.
If that's safer and more lucrative, give me riskier and less lucrative. Another ill-thought out, poorly written article. The author's apologies and explanations take up more space than the original nonsense.
It's not a tool for speculators or day traders, its a tool for investors. One day's performance makes absolutely nothing to a long term investor.
My rebuttals are lengthy. You should read them.
On Jun 17 11:06 AM Edit or perish wrote:
> "Although ETFs which invest in futures can be useful, a safer and
> potentially more lucrative strategy exists: "
>
> And today UNG is up almost 1% and FCG is down more than 4.5%.
>
> If that's safer and more lucrative, give me riskier and less lucrative.
> Another ill-thought out, poorly written article. The author's apologies
> and explanations take up more space than the original nonsense.<br/>
Just like the XLE and USO...XLE has treaded water and the contango filled USO has skyrocketed lately. 90% of stocks trade with the market shifts, no matter what industry they are in. I believe the best way to profit is to buy the commodity and forget the etf that is supposed to follow it.
When you say investment...well, hows that "investment" doing over the past 10 years - zero return for the S&P. Its a traders market now until we get out of this long recession.
It is a trader's market right now, but think of it this way:
Prices for every asset have dropped over the past year, mostly to undervalued levels. Now is a historical opportunity to buy. The ten year example is misleading, as it compares today's bottom with the near top of the Dot Com bubble.
Yes, the FCG could fall like a stone for the next six months even as natgas rises. That's wouldn't make UNG a good investment because it doesn't track natgas very well.
But it would be a buying opportunity for FCG, because higher natgas prices will eventually bring strong earnings to the companies held.
On Jun 17 06:16 PM mind_geek wrote:
> The gap in performance is high long term, agreed...but when these
> types of articles pop up, its time to go the opposite way. FCG will
> drop like a rock and UNG will rise, thus reducing the gap in performance.
> Its already happening..look at the last 5 days and counting. FCG
> is just another glorified stock index.
>
> Just like the XLE and USO...XLE has treaded water and the contango
> filled USO has skyrocketed lately. 90% of stocks trade with the market
> shifts, no matter what industry they are in. I believe the best way
> to profit is to buy the commodity and forget the etf that is supposed
> to follow it.
>
> When you say investment...well, hows that "investment" doing over
> the past 10 years - zero return for the S&P. Its a traders market
> now until we get out of this long recession.
UNG should be used for short-term bets (a few days to a few months); it is certainly not appropriate for long-term bets or "buy and hold". FCG, meanwhile should be used for long-term bets about the importance of natural gas or the "buy and hold" natural gas. It is a poor vehicle, however, for betting that natural gas prices will go up over the next two months. Considering this, I think it's foolish to say FCG is better; it is simply different.
Contango eats at its returns so its not the same as investing in the commodity itself.
On Jun 17 09:28 PM BioBoy wrote:
> Comparing FCG to UNG is comparing apples to oranges. While it is
> generally true that stocks of commodity-producing companies are correlated
> with the commodity price itself, the correlation can be weak or may
> only apply over longer time scales.
>
> UNG should be used for short-term bets (a few days to a few months);
> it is certainly not appropriate for long-term bets or "buy and hold".
> FCG, meanwhile should be used for long-term bets about the importance
> of natural gas or the "buy and hold" natural gas. It is a poor vehicle,
> however, for betting that natural gas prices will go up over the
> next two months. Considering this, I think it's foolish to say FCG
> is better; it is simply different.
As you pointed out, it's very analogous to GDX vs GLD. GDX correlates more with Gold than with the S&P. I expect that the same will be true for FCG. It will certainly rise over the long term if the price of NG rises, and most likely at a much higher rate than NG itself, since NG is near (or below) production cost at the moment, a higher price will create much higher marginal earnings.
Even if NG could be directly traded like gold, though, there would still be a fundamental difference between trading NG and investing in ETFs tracking NG companies. Imagine if NG extraction companies make a tech breakthrough to lower extraction costs. NG prices don't go up, but the companies' profits go up. The NG price is an object fundamentally different than the profit margin of NG businesses, at least in the long term.
On Jun 24 12:22 PM pdub271 wrote:
> Yeah UNG is crap, for all kinds of reasons, including the contango
> risk, and the possibility that UNG will eventually be slapped with
> regulations to lower its share of total futures holdings.
>
> Even if NG could be directly traded like gold, though, there would
> still be a fundamental difference between trading NG and investing
> in ETFs tracking NG companies. Imagine if NG extraction companies
> make a tech breakthrough to lower extraction costs. NG prices don't
> go up, but the companies' profits go up. The NG price is an object
> fundamentally different than the profit margin of NG businesses,
> at least in the long term.
Nat Gas will hit $20 in about 20 years.... NOW, however is the time to buy Nat Gas if you can somehow find a way to do it without UNG.
On Jun 17 08:18 AM drooyrich wrote:
> I do not agree - companies have been rising because of the stock
> market rebound, not because of better tracking of NG - furthermore,
>
> to buy today FCG puts you at risk of a downside in the market which
> to my opinion is very likely looking at technical analisys. I prefer
> HNU.TO (double exposure to NG) or other leveraged funds available
> in europe - best luck to all - NG anyway should rise at least to
> 20 soon..
On Jun 17 08:14 AM MadScientist wrote:
> I bought this one recently, and I must admit I am not overwhelmed.
> It is less influenced by the price of NG than it is by the overall
> market performance.
>
> Example: In the past week, NG has gone from roughly 3.75 to 4.30
> (an increase of 14%) while FCG has gone from 14.83 to 14.17 ( a decrease
> of 4.5%). Tracks the markets rather than the underlying commodity
> - if I want that, I'll buy SPY.