In the coming years natural gas is going to gain more ground as to the amount of industries it will penetrate and prove useful for. While its popularity increases along with the price this fund has a great chance of proving profitable to investors. This along with the spread of companies it has makes for a very good mix.
In our opinion, First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG) will be able to generate positive returns for investors due to the decreased downward pressure on natural gas prices. The fund is highly exposed to natural gas. We expect the Fed's economic stimulus to boost natural gas demand in the U.S. The increased natural gas usage in transportation, power generation, crude oil extraction, and manufacturing units, will help FCG to trade higher. In our opinion, FCG has bottomed out, and the stocks in its portfolio have a considerable potential to make use of the upcoming increase in demand. Moreover, if the Republicans win the upcoming elections, the index will have bright prospects. FCG decided to maintain the expense ratio at 0.6% until 2013.
FCG is an exchange traded index fund, which delivers returns through the yield and the price of the ISE-Revere Natural Gas Index. The index has 31 stocks in its portfolio. Equity securities generate revenues from the production and exploration of natural gas. The index is correlated with the level of production, and the prices of natural gas. The major proportion of the fund investment, around 90%, goes into common stock, which forms the index. Out of the common stock, 96% of the investment is exposed to the energy sector, as shown in the graph given below. The investments are primarily in U.S. equity securities, including large capitalization, mid capitalization, and small capitalization companies. Moreover, the fund also invests in U.S. government securities, money markets funds, short term investments, repurchase agreements, commercial papers, and fixed income securities with maturities of less than one year.
Shale Gas Boom
Due to the discovery of horizontal drilling and hydraulic fracturing, natural gas production has witnessed a significant boom. The abundant supply of natural gas in the U.S. has exerted a downward pressure on prices, which had fallen below $2/MMbtu. Currently, natural gas prices have recovered to $2.8/MMbtu. For the decline in natural gas prices primarily, the First Trust ISE-Revere Natural Gas Index Fund has generated negative returns of 2.4%, as compared to a 17.3% S&P composite 1500 Energy Index return and a 9.3% Russell 3000 Index return. The fund has bottomed out, and has significant potential to post greater returns given the increase in natural gas demand.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.