Natural gas has been the ultimate head fake. Just when investors think it may be set for a bounce, it gets shot back down. This has been the prevailing behavior of this all too abundant energy source for more than a half decade, and there’s a reason for it.
First, the supply is huge. It seems like very few days go by where we don’t hear of a huge new shale formation that has a crazy amount of natural gas in it. As one analyst said, if you have a long enough drill, there’s probably natural gas below your feet. That’s great news for America but not so exciting if you’re trying to make money on it.
Second, there’s huge supply but the demand is relatively weak. Think of your life for a moment. How much natural gas do you use? A furnace or stove? Maybe a dryer? Of course, the industrial demand is much higher but it still doesn’t come close to fossil fuel consumption.
That may change now that Congress is considering a bill to provide tax subsidies that will allow natural gas to become more commonplace. This bill has a lot of support, along with more than 100 cosponsors. That’s the best news for natural gas in a long time.
As an investor, you know that if you wait for everybody else to notice, you’ll be late to the party and miss the big gains... so we wanted to give you two ETFs to consider if the bill before Congress is signed into law.
The United States Natural Gas Fund, LP (UNG)
UNG has been the source of pain for investors for many years. UNG is a pure play on the price of natural gas. If this bill passes, the actual price of natural gas probably will not see a large scale bounce-- so tread lightly with this one. But one thing is for sure with natural gas-- you never know.
First Trust ISE-Revere Natural Gas Index Fund (FCG)
You may have heard that it’s hard to beat the market, so joining it may be the better strategy. That’s why index funds are a highly weighted vehicle in the portfolios of income investors. FCG is an index fund that tracks the price movements of the ISE- Revere Natural Gas Index. This index tracks companies that deal primarily in the exploration and production of natural gas. Although this index will be highly levered to the price of natural gas, it will not be as sensitive as UNG since these companies are, to some degree, diversified in their operations.
Buyer Beware
As they say, go big or go home-- and that may be true if you’re looking to capitalize on a longer term transition to natural gas. You won’t get the price appreciation you’re looking for if you invest in integrated companies or ETFs. If it has “oil and gas” in its title, it may be a little safer but there’s a good chance that it will be weighted more towards oil than gas. Find the pure plays (like Clean Energy Fuels (CLNE)) if you want to make money over the long term.
Of course, never invest without exhaustive research, so get to work.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
