How Can One Of The Best-Selling ETFs In 2009 Be Such A Losing Bet?

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January 4, 2010 2:19pm ETF BASIC NEWS NYSE:UNG

losing-bet“United States Natural Gas Fund lost almost 60% in 2009, but its difficulties went beyond falling prices for natural gas due to the poor economy and oversupply issues. U.S. Natural Gas Fund (UNG) , with assets of about $5 billion, was the worst-performing ETF


 in 2009 that doesn’t use leverage. The natural-gas exchange-traded fund was off 56.5% for the year, while the SPDR S&P 500 ETF (SPY), which tracks U.S. large-cap stocks, gained 23.4%, according to FactSet Research,” John Spence Reports From MarketWatch.

“Aside from the decline in natural-gas prices in 2009, the fund was also hit by a condition in futures markets known as “contango,” in which the price of longer-dated futures contracts is higher than the spot price,” Spence Reports.

“Investors should be mindful that this fund invests in natural-gas futures and not the spot price of natural gas,” wrote Morningstar’s Paul Justice in his most recent analyst report on the ETF. “This fund mostly invests in near-month futures contracts,” he added. “As each month draws to a close, the fund rolls over to the next month’s contract, and so forth. When the prices of those out-month contracts exceed the price of the near-month contract … the fund loses money each time it rolls futures. That explains why this fund has oftentimes declined in value even as natural gas prices rose, as the natural gas futures market was in contango at that time.”

“Traders attempt to game the huge ETF by trying to jump ahead of its trades when it rolls into the near-month futures contract. Investors in the natural-gas ETF are hoping the long-anticipated rebound in prices plays out in 2010,” Spence Reports.

U.S. Natural Gas Fund’s performance in 2009 “reflected a combination of historically low natural gas prices experienced in and historically high levels of contango, which reduces the return of holding futures contracts over time,” said John Hyland, chief investment officer of United States Commodity Funds LLC, the ETF’s sponsor, in an interview.

“The firm is a commodity pool operator with about $6.6 billion in assets under management as of Sept. 30, according to its Web site. Despite its terrible performance, U.S. Natural Gas Fund was one of the best-selling ETFs in 2009,” Spence Reports.

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