Natural Gas ETF

It is a kind of financial product that consists of investing in several assets 

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Christy Grimste
Christy Grimste
Christy Grimste
Real Estate | Investment Property Sales

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family REIT. Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her MBA and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Last Updated:December 18, 2023

What is a Natural Gas ETF?

A Natural Gas ETF (exchange-traded fund) is a kind of financial product that consists of investing in several assets, which in this case, are related to Natural Gas prices.

Investors often prefer to allocate their funds to such investment opportunities. As a matter of fact, instead of trading simple stocks of corporations in the Natural Gas market, it is preferred to deal with baskets of Natural Gas futures contracts. 

It is crucial for traders to properly understand how Natural Gas ETFs are different from other regular exchange-traded funds. 

Some of the most popular ETFs own the underlying asset; for example, industry-related ETFs have shares of listed corporations of the relative industry. 

On the other hand, Natural Gas ETFs do not have any ownership over natural gasses. Instead, they own natural gas futures contracts, meaning that investors get to hold natural gas indirectly. 

Natural Gas ETFs are strictly connected to the price fluctuations of the natural gas itself. Hence, favorable deals on such contracts depend on how the natural gas market moves.

Key Takeaways

  • A Natural Gas ETF is a financial product made of a basket of futures contracts exposed to natural gas prices. 
  • They are connected to the price fluctuations of the natural gas market.
  • Natural Gas exchange-traded funds are based on future contracts, which means that they may be exposed to the contango risk.
  • Investors looking for risky products use Natural Gas ETFs in short-term strategies.
  • These funds are traded on the New York Mercantile Exchange (NYMEX). 

structure of Natural Gas ETFs

Natural gas is in the category of commodities. It is helpful for several reasons. It can be used in houses for kitchens and heating. It is also used in other contexts, such as fuel for vehicles, the production of electricity, and to produce of plastic materials.  

Natural Gas exchange-traded funds are based on future contracts, which means they may be exposed to the contango risk. 

This situation occurs because every time a contract comes to maturity, managers of the NG ETF have to buy new futures that will be put on the market instead of expired ones. 

The new futures contracts are likely to have a higher price than the expired ones. As a result of this event, higher costs may occur every time a contract is renewed.

Once it happens several times, these costs can significantly increase the fund's general performance. 

Traders do not plan to use Natural Gas ETFs for long-term strategies, as the contango risk makes these financial products less appealing to investors. Moreover, even on the rise in the prices of futures contracts, the cost increase makes the transaction not profitable. 

Investors looking for risky products use Natural Gas ETFs for short-term purposes. By doing so, the additional costs generated by the contango are limited and cannot make an actual impact on the investment.  

Examples of Natural Gas ETFs

Natural Gas ETFs are correlated to the natural gas market. It means that the chances of investors having profitable transactions are related to how the industry prices rise or fall. 

There are several Natural Gas ETFs on the exchange market. Among the most famous there are:

United States Natural Gas Fund LP (UNG)

An exchange that is made to track the movements of natural gas prices. UNG issues shares that can be exchanged on the NYSE Arca.
It is composed of a commodity pool, which expels natural gas prices by giving investors natural gas futures contracts. 

It reflects the results of the daily changes of the futures contract on natural gasses exchanged on the New York Mercantile Exchange (Benchmark Futures Contract). Investing in the fund makes it possible to invest in futures contracts that expire in only a month. This mechanism gives the fund more exposition to the contango risk. Moreover, it also helps investors with short-term strategies, seeking an inflation hedge. 

The United States 12 Months Natural Gas Fund LP (UNL)

UNL is a fund that is made to look for price movements of natural gas. It issues shares that can be traded on the NYSE Arca.

The fund's pool gathers traders' investments and exchanges options and futures later.

For example, it owns natural gas futures contracts to have a long-term position on natural gas prices. UNL also diversifies its structure by acquiring several maturities, with the primary goal of lowering the impact of the contango. 

The fund also invests in forward and swap contracts. Investors might be interested in the fund for hedging against inflation purposes.

iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ)

GAZ is structured as an exchange-traded note (ETN), an unsecured debt bond with attributes of stocks, and does not produce interest incomes. 

The ETF aims to expose the Bloomberg Natural Gas Subindex Total Return index. The benchmark mirrors the potential returns available via investments without leverage in the futures contracts comprising the Index. By investing in GAZ, individuals are exposed to the credit risk of the organization responsible for issuing the financial product. Furthermore, it does not follow the changes in spot natural gas prices since the underlying Index is made of futures contracts. 

  1. ProShares Ultra Bloomberg Natural Gas (BOIL)
    BOIL looks for daily investment results that are equal to twice (2x) the performance of the Bloomberg Natural Gas Sub-Index.
  2. ProShares UltraShort Bloomberg Natural Gas (KOLD)
    This fund looks for investment results equal to twice the opposite (-2x) of the daily performance of the Bloomberg Natural Gas SubindexSM.

These funds are mainly composed of natural gas futures contracts with maturities of a few months and are generally traded on the New York Mercantile Exchange (NYMEX). 

Traders must be careful when investing in such products because their prices are highly volatile, and profits can be burnt in a few seconds. 

Researched and authored by Alessandro Davì LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: