Natural Gas ETPs Head-To-Head: GASZ Vs. UNG

 |  Includes: GASZ, UNG
by: CommodityHQ

By Jared Cummans

At this point, there isn’t anything new to say about natural gas. Its massive decline has been well documented, and it seems that most of the investing world has temporarily lost hope that NG will recover anytime soon. While it is true that recent losses have been attributed to an unseasonably warm winter as well as growing supply, natural gas has been on a slippery slope since the recession began. But despite its losses, it is also widely agreed that this commodity will play an increasing role in out world’s future energy supply, as the fossil fuel is being utilized in a number of new mediums.

This leaves investors in a pickle; adding NG exposure seems like a sound idea for the long term, but picking the right investment seems impossible. Many have turned to ETFs to gain exposure to their favorite commodities, as these products make investing simpler and take away a lot of the risks involved with futures investing. By far, the most popular ETF for natural gas comes from the United States Natural Gas Fund LP (NYSEARCA:UNG). But UNG has burned thousands of investors over the years, prompting many to beg for an alternative solution. Below, we compare UNG to a competing ETN that offers a much better play on this sputtering commodity.

United States Natural Gas Fund LP (UNG)

UNG is an ETF that invests in front-month NG futures, a dangerous allocation. Utilizing a front-month strategy in an ETF means that UNG has an automated roll process that sells the current contract and buys into the next nearest one at some point every month. Natural gas is well-known to exhibit massive contango, a phenomenon by which near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. When UNG completes its automated roll, it typically sells the current contract and buys into the more expensive, next month, contract (this of course assumes a contangoed environment, a safe assumption with NG). This instantly erases value for the fund and its investors. In fact, UNG has lost nearly 97% of its value since inception and has been forced to undergo several reverse splits just to remain open [see also.

So how has such a terribly-performing fund stayed alive? UNG is a popular trading instrument, with an ADV topping 8.5 million. It is important to note that UNG would actually perform quite well in NG ever got on a tear; its contango would simply minimize gains. But NG has not been on a tear and thus, UNG has gotten slaughtered despite remaining an investor favorite.

E-TRACS Natural Gas Futures Contango ETN (GASZ)

This ETN employs a strategy that is designed to eliminate the negative effects of contango by providing short exposure in front month natural gas futures contracts and long exposure in mid-term natural gas futures contracts. That means that for as long as contango exists, GASZ will be able to profit from its short positions in near term contracts. That being said, if NG ever fell in backwardation (the opposite of contango) this fund could struggle, but seeing as how NG is virtually in contago (save one or two months) through 2020, GASZ seems to have a promising future.

GASZ debuted midway through 2011, but has already proven to be a strong fund. While UNG has surrendered nearly 44% this year, GASZ has actually gained 18%, even with NG futures dipping. Its short positions in near term contracts has proven to be a very successfully strategy that demands a second look from investors.

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The above chart compares the performance of GASZ and UNG since the inception of the former. It is clear, now, that there is a better ETN for obtaining exposure to natural gas futures, but investors don’t seem to know it yet. GASZ has just $12.8 million in assets (just 1.6% of the assets that UNG holds) and an ADV of roughly 12,000. If you are one of the investors who has gotten burned by UNG, this ETN could provide you with some much-needed redemption. No matter what your investment objective may be, if you are looking to add NG exposure to your portfolio, look beyond UNG to this unique fund.

Disclosure: No positions at time of writing.

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