Natural Gas Etf: A Guide To Investing Wisely

Natural gas ETFs (exchange-traded funds) are funds that track the price of natural gas. There are two types of energy ETFs: commodity funds and industry funds. Commodity ETFs track the price of natural gas by using derivatives such as futures in their construction. Industry ETFs track companies involved in the exploration and production of natural gas. While natural gas ETFs can provide valuable exposure to the natural gas industry, they are not without risk. It is important for investors to carefully research and understand the underlying assets and market conditions before investing in these funds.

Natural gas ETFs to consider

There are several natural gas ETFs to consider, each with its own unique approach and level of risk. Here are some of the top options to consider:

First Trust ISE Revere Natural Gas ETF (FCG)

This ETF tracks the ISE-REVERE Natural Gas Index, which includes 30 companies primarily involved in natural gas exploration and production. These are mostly American independent producers, such as Chesapeake Energy and Devon Energy. This ETF is ideal for investors who believe in a rebound in natural gas prices, as it offers tremendous upside potential. However, it also carries the risk of prolonged downturns in gas prices, which could hurt profits.

Alerian Energy Infrastructure ETF (ENFR)

ENFR is not a pure natural gas play but focuses on energy infrastructure, including midstream operators like Kinder Morgan and utilities like Dominion Resources. These companies are less affected by commodity price fluctuations and benefit from growing demand for cheap North American natural gas. The fund offers a steady dividend and the potential for price appreciation, making it a lower-risk option.

United States Natural Gas Fund (UNG)

UNG is one of the most heavily traded natural gas ETFs and aims to track the daily changes in natural gas prices at the Henry Hub in Louisiana. It invests in futures contracts traded on exchanges like NYMEX and ICE Futures. UNG provides direct exposure to natural gas prices, but investors should monitor gas markets actively to make timely buying and selling decisions.

VelocityShares 3x Long Natural Gas ETN (UGAZ)

UGAZ offers leveraged exposure to natural gas prices, seeking to replicate three times the performance of the S&P GSCI Natural Gas Index ER. It is ideal for traders looking for amplified returns based on natural gas price movements.

ProShares Ultra Bloomberg Natural Gas (BOIL)

BOIL aims to provide daily returns that correspond to two times the daily performance of the Bloomberg Natural Gas Subindex. It invests in natural gas futures contracts and may also use swaps during market emergencies or disruptions. BOIL provides a way to amplify returns based on natural gas price movements.

VanEck Vectors Unconventional Oil & Gas ETF (FRAK)

FRAK follows the MVIS Global Unconventional Oil & Gas Index, tracking companies involved in the exploration, development, extraction, and production of unconventional oil and natural gas. While the fund has experienced significant losses, it trades at depressed multiples, offering a potential value opportunity.

When considering these natural gas ETFs, investors should carefully evaluate their risk tolerance, investment objectives, and market conditions. It is also essential to understand the underlying holdings, expense ratios, and potential risks associated with each ETF.

Natural gas producer-targeted index funds

By investing in an ETF like FCG, you gain exposure to a basket of companies that stand to benefit from a rebound in natural gas prices. These companies have been significantly impacted by the downturn in natural gas and oil prices, so a recovery could result in substantial upside potential for the fund. However, it's important to remember that a prolonged downturn in gas prices could also hurt the profits of these companies, leading to poor returns or potential losses for the fund.

When considering investing in natural gas producer-targeted index funds, it's crucial to assess your risk tolerance and investment objectives. These types of funds tend to carry more risk than funds that focus on midstream operators or utilities in the natural gas industry. Therefore, they may be more suitable for investors seeking higher returns and who are comfortable with taking on more risk.

Before investing in any ETF, be sure to conduct thorough research, including analysing the fund's performance, fees, and holdings. Additionally, keep in mind that natural gas prices can be influenced by various factors, and predicting a rebound in prices may be challenging. As with any investment, there is always the risk of losing money, so it's important to carefully consider your investment decisions and seek professional guidance if needed.

Infrastructure for income investors

If you're looking to get regular paychecks, the Alerian Energy Infrastructure ETF (ENFR) may be worth considering. This fund is made up of 36 different companies, including midstream operators such as Kinder Morgan and utilities like Dominion Resources. These companies are the glue that connects the natural gas, oil, and power infrastructure together.

The demand for their services is largely based on consumption rather than commodity prices, so the drop in oil and natural gas prices affects them less (and can even benefit the power companies) compared to producers. Furthermore, demand for cheap North American natural gas is expected to continue to grow in the coming years, making the businesses held in this fund a potentially great source of predictable, long-term cash flows.

The fund pays a 3.2% dividend at recent prices, and there's a solid chance that gets increased as demand for midstream services increases. The fund paid out $0.61 per share in 2014 and is on track to pay out a similar amount in 2015.

The Alerian Energy Infrastructure ETF (ENFR) has an expense ratio of 0.65% per year, or $65 on a $10,000 investment. This fund isn't a pure play on natural gas exploration and production, but that's a benefit rather than a disadvantage. ENFR focuses on the midstream segment, which is more defensive and has the potential to grow dividends due to improving balance sheets.

Looking ahead, the dividend scenario with ENFR could improve even further. According to Alerian, "with midstream companies approaching a free cash flow inflection point, particularly in 2021, it's possible that excess cash flow will drive further dividend growth."

Equity exposure-based ETFs

One example of an equity exposure-based ETF is the First Trust ISE Revere Natural Gas ETF (FCG). This fund tracks the ISE-REVERE Natural Gas Index, which includes 30 companies primarily engaged in the exploration and production of natural gas. These companies are mostly American independent producers, such as Chesapeake Energy and Devon Energy. Investing in this ETF provides exposure to a basket of top natural gas companies, allowing investors to benefit from their performance.

Another option is the Alerian Energy Infrastructure ETF (ENFR). This fund focuses on energy infrastructure, often referred to as the "toll road" aspect of the industry. It includes midstream operators like Kinder Morgan and utilities such as Dominion Resources. These companies are less affected by commodity price fluctuations and benefit from stable demand for their services. The fund offers a regular dividend payout, making it attractive for income-seeking investors.

It is worth noting that equity exposure-based ETFs may not provide direct exposure to natural gas prices. The performance of these ETFs is influenced by the broader market and the specific companies included in the fund. Therefore, investors should carefully consider the holdings of the ETF and their risk tolerance before investing.

When considering equity exposure-based ETFs, it is important to assess the fund's diversification, expense ratio, and historical performance. Diversification across multiple companies can help mitigate the risk associated with investing in a single company. Additionally, comparing the expense ratios of different ETFs can help identify the most cost-effective options. Finally, reviewing the historical performance of the ETF can provide insights into how it has navigated different market conditions.

In summary, equity exposure-based ETFs offer an indirect approach to investing in natural gas by providing exposure to companies involved in the exploration, production, and infrastructure of natural gas. Investors should carefully evaluate their options, considering factors such as diversification, expense ratios, and historical performance, to make informed investment decisions.

Futures-backed ETFs

One example of a futures-backed natural gas ETF is the United States Natural Gas Fund (UNG). UNG seeks to reflect the daily changes in the price of natural gas delivered at the Henry Hub in Louisiana by investing primarily in near-month natural gas futures contracts traded on exchanges such as the New York Mercantile Exchange (NYMEX) and ICE Futures. The fund rolls over expiring contracts to the next month, which can result in a loss if the subsequent contract is more expensive.

Another example is the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), which provides daily returns corresponding to two times the performance of the Bloomberg Natural Gas Subindex. BOIL invests primarily in natural gas futures contracts but may also use swaps in specific situations, such as market emergencies or disruptions.

It is important to note that futures-backed ETFs are subject to the risks associated with derivatives and margin trading. These ETFs may not accurately track the underlying commodity price, and regulatory agencies closely monitor commodity futures due to their potential impact on availability.

Before investing in natural gas ETFs, individuals should understand the risks involved and consider seeking professional guidance.

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