Goodbye UGAZ And DGAZ: It's Been An Interesting Ride

QuandaryFX profile picture


  • Credit Suisse has started the process of delisting UGAZ and DGAZ and investors need to find alternatives to maintain exposure.
  • Gas fundamentals are still bullish due to declining production and recovering demand.
  • UNG and UNL represent solid alternatives to UGAZ and DGAZ, albeit at reduced leverage.

Over the past 24 hours, Credit Suisse has announced that it will be delisting several leveraged ETNs, among which is the VelocityShares 3x Long Natural Gas ETN (UGAZ) and its inverse the VelocityShares 3x Inverse Natural Gas ETN (NYSEARCA:DGAZ). In this piece, I will walk through the delisting as well as give a view on natural gas fundamentals. Ultimately, I am bullish natural gas and believe that now is a great time to buy the commodity and I will share which ETPs I believe will be good plays to capture the move.

The Delisting

If you haven't had a chance to read the press release above, I'd check it out. Essentially, it appears that Credit Suisse has decided to step back from leveraged products on volatile commodities. UGAZ and DGAZ trade on NYSE ARCA which means that the delisting date at this time is July 10th - or about 2 weeks from now.

Investors need to know a few things about how this delisting will occur. The first of which is that individuals should start to expect diminished trading volume in the instrument heading into the delisting date. What this functionally means is that if you are actively trading UGAZ or DGAZ, expect to see the bid-ask spread narrow as well as the depth of volume available to fill orders to diminish. At this point, UGAZ/DGAZ are sinking ships and active traders and investors are headed for the exits. For this reason, I suggest that any remaining positions in the ETNs be exited at this time to avoid the progressive loss of liquidity we can expect going forward.

There is a big question mark in the air here and that is "Why?" Why has Credit Suisse decided to exit from the leveraged ETN business by closing out several very popular products. One can only speculate as per the reason because the only thing mentioned in the press release is as follows:

That's essentially corporate-speak for, "We're not telling you why we're getting rid of these products." My personal speculation is that this likely has arisen due to behind-the-scenes hedging issues. Since these are ETNs, investors are basically compensated at wherever the index is marked, meaning that Credit Suisse is required to actively buy and sell the underlying commodity to hedge its exposure.

And given that volatility in markets has surged to record levels, Credit Suisse has potentially seen some hedging errors behind the scenes. This is all speculation and conjecture, but I can't think of another feasible reason of why the bank is essentially throwing away several million dollars per year of fees which it is earning from investors. For an additional reading which gives some insight into this move, I suggest this piece from

While UGAZ and DGAZ are going away, the natural gas markets are not. So, let's take a quick run-through of the fundamentals of gas and then conclude with some viable alternatives for trading these notes.

Natural Gas Markets

First off, the natural gas data has started to show a shift towards bullishness and away from the bearish trends which have dominated the market for the first half of this year.

What the chart above shows is that for the first time this year, we have seen three consecutive weeks of natural gas inventories building at the 5-year average. Prior to this, nearly all data points have been above the 5-year average which is indicative of bearishness in that it signals that inventories are underperforming versus what is typical for that specific time of the year.

The key driver to zero in on here is the collapse in production as evidenced by a shrinking rig-count.

Gas production is poised to collapse over the coming weeks as the drop in rig count is factored into total output. All else equal, a collapse in production necessitates higher prices for recovery which means that the current record decline of rigs means that we are in the last stages of the bear market: demand will eventually surpass available supply which means that prices will rise.

Prices haven't started to rise at this point, but this is the fundamental picture at work beneath the surface. Going forward, I expect that the trend we are seeing in inventories contracting against the 5-year average will continue. The key tie-in here for gas ETP traders is that there is a direct correlation between inventory changes and price: as stocks fall, gas prices rise.

This is the relationship I am monitoring and expecting to play out over the coming weeks and months. Gas production is collapsing while demand is recovering from the coronavirus business shutdowns. This is a recipe for tightening inventories and rising prices.

UGAZ and DGAZ Alternatives

To trade this recovery in gas, I suggest two alternatives depending on what you are looking to accomplish. The first alternative is the United States Gas Fund (UNG) due to its simplicity and liquidity.

UNG is a remarkably simple ETF: it holds the front month natural gas futures contract and then two weeks prior to expiry, it rolls this exposure into the second month contract. It repeats this process in perpetuity.

While the benefit of UNG is its simplicity, the detriment of UNG is also its simplicity. The problem with UNG is that it is heavily exposed to roll yield losses. Roll yield is what you get when futures contracts converge to the spot price of natural gas. The following chart captures the entire problem of roll yield.

This chart shows an average of the difference between a few futures contract and the spot physical price of natural gas at Henry Hub. The data is divided by trade day of the month - that is, how many days are we into a month which begins after the expiry of the prior front contract. This data shows a few key things:

  • Futures are almost always priced above the spot level of natural gas
  • During the month, futures contracts gradually fall towards the spot price of gas
  • The closest contracts to expiry tend to fall the most, with the front contract seeing its difference to spot eroding to nearly zero at month-end

This is the entire problem of roll yield contained in single chart. Since UNG is holding the front month contract for a good portion of the month and then shifting exposure into the second contract, it is experiencing near-constant losses from roll yield. Its futures contracts are slowly losing value as the contract shifts towards the spot price of gas which means that investors will lose value through time. I estimate that UNG is losing about 10-14% per year in relation to outright gas prices due to roll yield based on historic contango levels seen in the market.

What UNG has going for it is liquidity: lots of people trade this ETF and it's fairly easy to get in and out of positions. What UNG has going against it is its simplicity: it is entirely agnostic to roll yield which means that shares continue to suffer through time.

However, there is an alternative and that is the United States 12 Month Natural Gas Fund (UNL). This ETF is created by the same provider as UNG, but it offers exposure across the full 12-months of the futures curve. As you saw from our prior chart, this means that roll yield, while still present, is substantially less.

UNL essentially takes UNG's exact methodology of rolling exposure but shifts exposure 12 months out along the curve. This means that only a small portion of funds are exposed to the heavy losses of roll yield while positions out further along the curve see minimal losses.

The impacts of this methodology are material. For example, here is the year-to-date performance of UNL versus UNG.

You are reading this correctly - UNG has underperformed UNL by a whopping 30% this year due to both roll yield as well as a strengthening forward curve.

The detriment of UNL however is its liquidity - not many traders are in this product at the moment, so you will need to likely enter using limit orders between the bid-ask spread or utilize market-on-close or open orders.

UGAZ and DGAZ have been very volatile ETPs which have pulled in hundreds of millions of dollars from retail investors. I ultimately believe that Credit Suisse is making the wrong decision to remove these products, however, it is their decision to make and as investors we must look for alternatives in a constantly-changing market. If you're still interested in trading natural gas, I suggest UNG and UNL as viable alternatives. Granted, the leverage factor has been removed in these ETFs, but investors can change size appropriately to get comparable levels of exposure.


Credit Suisse has started the process of delisting UGAZ and DGAZ and investors need to find alternatives to maintain exposure. Gas fundamentals are still bullish due to declining production and recovering demand. UNG and UNL represent solid alternatives to UGAZ and DGAZ, albeit at reduced leverage.

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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