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By Jared Cummans

The United States Natural Gas Fund (NYSEARCA:UNG) has long been one of the most popular ETFs on the market. Known for its hefty volatility, this first generation commodity ETF invests in front-month futures for natural gas. But the reason why UNG is so well-known is not because it was among the first of the commodity ETFs, but because of its abysmal performance. UNG has been down as much as 98% since inception (prior its rally in the past few months) and has been forced to undergo multiple reverse splits just to stay open. That being said the fund still trades millions of times per day and always has a healthy asset base.

The Demise

UNG debuted in April of 2007 to a relatively low response, trading just 5,200 times on its first day. But as time went on, the fund began gathering steam, and was soon cracking 10,000 and eventually cracking the 1,000,000 mark on July 24th, 2008 when the fund dropped roughly 5.5% in one day. As the recession continued to deepen, UNG fell hard. The fund's historical high came on July 1st, 2008, when it finished out the day at $507.84 (note that this was well before the fund was ever forced to reverse split). From there, things were all downhill as this ETF fell face first into a deadly tailspin.

As natural gas prices took a hit, UNG got pummeled, earning its crown as one of the worst performing ETFs of all time. UNG found its bottom almost five years to the day from its inception, as the fund touched $14.25 on April 19th of this year. But since then, the fund has been on a tear, causing a number of investors to re-consider their positions in the fund and how they trade it [see also 25 Ways To Invest In Natural Gas].

The Rise

The past few months have watched this asset claw its way higher as temperatures around the country have risen. Searing heat has led to a much higher demand for gas-powered appliances and helped to alleviate some of the growing stockpiles. To better define just how hot it was, the government came out with data revealing that July 2012 was the hottest month in U.S. history. This caused natural gas prices to tack on nearly 70% over a three month period (despite plenty of volatility along the way). UNG itself jumped 55% during that same time period.

As such, a number of natural-gas based investments have performed exceptionally well, leading many to make bets on the industry. The only question that remains is how long this rally will last and if you will be able to time it properly. One of the most likable features of UNG is that it has the ability to be shorted and there are also options on the fund. With such an uncertain future for both natural gas and this ultra-popular trading vehicle, it would appear that options are the safest way to make a bet on the movements in UNG [see also Five ETFs to Ride the Natural Gas Rally].

Disclosure: No positions at time of writing.

Source: The Rise And Demise Of The United States Natural Gas Fund ETF