Ameristock Funds' New Gas Futures ETF: An Attractive Instrument In So Volatile a Market

Ameristock Funds, the group behind the $850 million US Oil Fund (AMEX: USO), became the first company to launch a futures-based exchange-traded fund tied to the price of natural gas.  The United States Natural Gas Fund began trading on the American Stock Exchange on April 18, under the ticker symbol “UNG.” It is technically managed by Victoria Bay Asset Management, the ETF offshoot of Ameristock Funds.

The prospectus is available here.

In related news, Victoria Bay filed papers with the Securities and Exchange Commission [SEC] for the right to launch ETFs tied to heating oil and gasoline futures, as well (more below).

Natural Gas Futures
UNG, like other futures-based ETFs, will track the price of natural gas futures, and not the spot price of natural gas. Those two can differ significantly due to two factors:

Interest Income: The fund will invest its collateral assets in Treasuries, earning interest at short-term rates. (Currently, about 5.2 percent)

Roll yield: Futures contracts expire each month, and the fund must “roll” into the next contract. That next contract … representing the price of the commodity sometime in the “future”… may be either more or less expensive than the price of the commodity today.

The roll yield is an important – and poorly understood – part of commodity returns. The “spot price” you hear about on the nightly news is not the price that UNG (or other futures-based ETFs) will trade at. Historically, in fact, roll yield has been the largest single contributor to commodity returns.

Unfortunately, the natural gas market is currently in what’s called “contango,” meaning that later dated futures are more expensive than the spot price. The May natural gas contract on the New York Mercantile Exchange [NYMEX] is currently priced at 7.492, while June is at 7.627 and July at 7.793. Using the June figure, the one-month roll yield at current prices is negative 1.8 percent.

Oil investors can sympathize: oil has been and continues to be stuck in a vicious contango, which has hurt investor returns even as the price of oil has gone up. Currently, the one-month roll yield calculation for crude oil futures leads to a negative 2.36 drop.

UNG will charge a base management fee of 60 basis points on the first $1 billion in assets.  Trading and other fees will add an additional 15-20 basis points of expenses. The American Stock Exchange lists the “all-in” expense ratio at 77 basis points. Of course, the fund is expected to earn 5.2 percent each year in interest, which will more-than-offset these cash fees.

The market for natural gas is notoriously volatile, which should make UNG an attractive trading instrument.  The fund traded over 90,000 shares in its second day on the market, a strong showing for a new ETF.

There are other natural gas ETFs in registration. Barclays Global Investors has filed for a futures-based fund (the iShares GS Commodity Natural Gas Indexes Trust), and First Trust has filed for a fund tied a group of quantitatively screened natural gas stocks (the First Trust ISE-Revere Natural Gas Fund). Both products are still in registration.

Building An Energy Empire
In other news, Ameristock filed new papers with the SEC yesterday for the right to expand its energy-focused ETF empire into heating oil and gasoline.  The United States Heating Oil Fund will track the price of No. 2 Heating Oil futures, while the United States Gasoline Fund will track the price of so-called RBOB gasoline futures.  The funds will likely take a number of months to make it through registration.

The prospectus for the heating oil fund is available here.

The prospectus for the gasoline fund is available here.

Comments

[nym:]

Good info in article, but author doesn't have a clue on when to buy. I urge you to look at seekingalpha.com/artic... to see how the fees add up as contracts roll over every month. The author's best bet to get his money back is to sell to the greater fools that come along. Judging from the thumbs down given here to some of the better comments, there are plenty of fools around.

Aug 13 03:37 PM

[nym:]

Sorry about that: posted on the wrong article.

Aug 13 06:54 PM