Long-Term Outlook For Natural Gas ETFs

January 8, 2014 5:17pm NYSE:FCG NYSE:UNG

natural-gas-etf2013 was choppy for commodity investors due to Fed tapering talks, strengthening dollar and continued bullishness in the stock market. Despite this sluggish trend, natural gas emerged as a solid performer, and ended the year with impressive gains of about 30%.


Whether natural gas will continue this surge in 2014 depends on the broad commodity trends and supply/demand balance.

Near Term Demand is Rising

Natural gas will likely see an increase in its prices from the chilly weather across the Midwest and East Coast to open up January. The stormy weather and below-average temperatures across various states of U.S. would boost demand for natural gas to fuel heating at homes and business. Notably, about half of U.S. households use natural gas as the primary source of heating.

Investors should note that November-March is generally the peak demand period for gas consumption in the U.S.

Falling Near-term Supply 

As per the latest EIA storage report, natural gas stockpiles fell 97 billion cubic feet (bcf) in the week ending December 27. Though this is below the analyst expectation of 126 bcf, it is much higher than the five-year average decline of 8.9 bcf. This suggests that the bullish trend might continue in the near term.

However, the continued growth in shale gas production could increase the inventories going forward which in turn result in a slide in natural gas prices (read:Play the U.S. Oil Boom with These Energy ETFs).

Long-term Also Looks Bright

According to the Energy Information Administration (EIA), the demand for natural gas will increase gradually in the coming years as this energy source will continue to replace coal to generate electricity in the U.S.

With this, natural gas is expected to overtake coal as the largest source of U.S. electric generation by 2040. Natural gas usage will increase to 35% of total electric generation while coal usage will drop to 32% in 2040. Further, EIA expects the U.S. to become a net exporter of natural gas by the end of 2016 thanks to booming production.

Moreover, natural gas will be used as an alternative fuel for new power generation plants over the coming years, thereby leading to increased demand for the commodity.

ETFs to Consider

Based on the current trends and promising long-term growth outlook, natural gas could continue its winning streak to start 2014. Given this, we have highlighted some of the most popular ETFs for investors seeking to tap the surge in the commodity.

For those investors, any of these could be worth playing in 2014 if the cold weather continues to hit most of the U.S., and usage of natural gas continues to rise.

First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG)

This ETF offers exposure to U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 28 stocks in its basket, which are well spread out in terms of individual securities.

Quicksilver Resources, Magnum Hunter Resources and Swift Energy occupy the top three positions in the portfolio with a combined 12.34% of total assets. The fund has amassed $454 million in its asset base while sees solid volume of nearly 500,000 shares per day. The expense ratio came in at 60 bps.

FCG is up nearly 20% in 2013 and has a Zacks ETF Rank of 2 or ‘Buy’ with ‘High’ risk outlook, suggesting that the product would continue to outperform in 2014 as well.

United States Natural Gas Fund (NYSEARCA:UNG)

This fund provides direct exposure to the spot price of natural gas on a daily basis through future contracts. Natural gas futures are one of the most actively traded futures contracts and represent the primary U.S. benchmark for natural gas.

It is by far the most popular and liquid ETF in the natural gas space with AUM of $958.3 million and average daily volume of over 5 million shares. The ETF charges 60 bps in fees per year and surged 17.4% in 2013 (read: Is This a Better ETF For Natural Gas Investors?).

United States 12 Month Natural Gas Fund (NYSEARCA:UNL)

This is another choice available in the space to play in the natural gas futures market on a daily basis. UNL is less popular and less liquid with AUM of just $28 million and average daily volume of less than 16,000 shares.

It is a high cost choice, charging 75 bps in annual fees. The ETF added 12% in 2013 and looks to be less volatile than UNG thanks to the spread out futures profile of the product.

This article is brought to you courtesy of Eric Dutram.


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