Goldman Sachs (NYSE:GS) has filed papers with the SEC for the right to launch a new ETF tied to the price of natural gas. The new iShares Goldman Sachs Commodity Natural Gas Indexed Trust will track the performance of a fully collateralized investment in natural gas futures, as traded on the New York Mercantile Exchange [NYMEX: NG]. Like most commodity index funds, the fund will be tied to the value of a rolling futures account, with one NG contract replace the next from month-to-month.
The fund will charge 89 basis points in expenses, although that will be offset by interest income expected to ring the register at more than 5 percent. It will list on the New York Stock Exchange, but has not yet been assigned a ticker.
The prospectus is available here.
The ETF won’t be for the faint of heart. As the prospectus warns, the price of natural gas has been “extremely volatile over the past few years.” Moreover, the NG market has historically traded in contango, meaning that the price of out-dated contracts is higher than the price of near-term products. As a result, investors effectively lose money on every trade.
Interestingly, that’s not the case right now: As of January 25, the February NG contract at the NYMEX brought $7.315, while March earned $7.301 and April fetched 7.174. That’s not a rip-roaring backwardation, but for investors used to suffering through the hell of contango, it’s something!
Still, the performance of the index has been nothing to write home about: while the index topped 119 in early 2001, it has since been literally decimated, falling to just 10.28 at the start of this year. The culprit is contango and falling natural gas prices, spurred in part by the reliable domestic supply and in part by weather trends. But prices can jump around enormously – it’s not that uncommon for prices to move as much as 10 percent in a single day, depending on weather forecasts, supply difficulties, etc.
CERFing For Profits
Like other iShares commodity funds, the natural gas ETF will achieve its exposure through CERFS – long-term options that exist solely for the purpose of supporting ETFs. CERFs trade on the Chicago Mercantile Exchange, although – as yet – the natural gas CERF has not yet made its debut. The CERFs track the price of the underlying index, so while you don’t have to “roll” the CERF, they effectively capture the roll yield of the basic, NYMEX-traded NG contract.
So far, this novel structure has worked well for BGI, lowering trading costs and possibly improving the tax efficiency of the funds. But there’s always a risk that a full-blown market in the CERFs won’t develop, and that liquidity will be too thin to support the ETF.
Opening The Market
It will be nice for investors to be able to tap into the price of natural gas. Natural gas accounts for almost a quarter of U.S. energy consumption, and the existence of both natural gas and oil ETFs will create interesting cross-trades, as investors look at different ways to value a British Thermal Unit [BTU] of energy.
Of course, BGI isn’t the only company moving into the natural gas space. In November, Revere Data and the International Securities Exchange (ISE) teamed up to launch a new natural gas index tracking the value of companies involved in the natural gas space (see here). The ISE benchmark, which has an unusual quantitative screen designed to select stocks for outperformance, can be accessed through futures and structured products.