Why I Consider This Natural Gas ETF A Scary Investment (UNG)

“For me, the most terrifying investment vehicle in the space is an ETF that has vaporized untold amounts of wealth since some mad scientists of Wall Street brought it to life in 2007. I’m talking about the United States Natural Gas Fund (NYSE:UNG) exchange-traded fund.  The ETF’s popularity is easy enough to understand. Like the SPDR Gold Trust (NYSE:GLD) or the Powershares DB Agriculture Fund (NYSE:DBA), UNG provides investors a way to bet on the direction of a commodity (or basket of commodities, in the case of the agriculture fund) without having to accept company risk, dabble in futures contracts, or take delivery of a silo full of grain,” Toby Shute Reports From The Motley Fool.

Shute goes on to say, “Commodities increasingly viewed by investors as an asset class, such funds are all the rage with pension funds, hedge funds, and retail investors alike. (NYSE:UNG) trades more than 20 million shares daily, or well over $100 million by dollar volume. The liquidity here is tremendous, keeping the fund price closely in line with daily net asset value. Nothing frightening so far, right? The problem with (NYSE:UNG), as well as countless other ETFs that invest in near-month futures contracts, is that the fund’s value gets chewed up like a zombie victim as the contracts get rolled from month to month. Compounding this issue of “roll yield” is that the larger the fund gets, the harder it gets to nimbly exit expiring contracts and enter new ones. The fund spreads its roll dates over four days, which in theory should help to minimize the impact of its trading, but I still suspect that other savvy market players are able to game this pattern.

“After the past few years’ performance — shares are off roughly 85% since inception — you’d think that investors would have run away screaming by now. For some reason, though, they just keep getting lured back in. Perhaps there’s a mind-control device at work here. That, or investors think they can actually time a recovery in natural gas with great enough precision to avoid getting their faces ripped off by the Negative Roll Yield Mutant.  If you want to trade in and out of this ETF in a matter of minutes or hours, that’s your prerogative,” Shute Writes.

Take a look at our category on the ETF for more in-depth articles below:

United States Natural Gas Fund (NYSE:UNG)  Visit Our (UNG) Category: HERE

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