The Trouble with Commodity ETFs

Dec.23.09 | About: The United (UNG)

Less than two months after my detailed analysis on one pig of an ETN, and less than a week after reiterating the pathetic performance of the VXX as the worst ETN ever, comes this news from Bespoke and Clusterstock.

First, from Bespoke:

Natural Gas ETF (NYSEARCA:UNG): Heads I Win, Tails You Lose

While the shortcomings of ETFs that track commodities have been well documented, the discrepancy between the price of natural gas and the ETF that is meant to track its price provides a great reminder of why many of these more exotic vehicles should be avoided. As always, investors should know what they own and look into these vehicles before investing in them.

Clusterstock puts it a bit more bluntly:

“The United States Natural Gas performance nightmare continues.” (Click to enlarge)

IMAGE ung This Isnt A Surprise EitherClick to enlarge

Let me be clear, these things are garbage pure and simple. ETFs that trade liquid instruments with no duration issues (like stocks) are fine. But when you’ve got an ETN or ETF that is trying to mimic things where backwardation and contango exist, with expiration dates (thus making it necessary to roll from one contract to another), then investors are going to get burned … BAD.