Energy has been a volatile sector over the past few years. In 2017 the Goldman Sachs Commodities Index (GSCI) has gained 1.74% through the end of November and the S&P 500 energy stock sector is reporting a loss of -7.25%. The outlook is uncertain for 2018 however investors continue to look to various segments of the energy market for potential gains.
Natural gas prices provide one segment of the market for speculation. Despite challenges in the energy market overall, America’s energy companies continue to do a great job producing natural gas far more cheaply than they have in the past, finding ways to make a profit even under today’s depressed oil and gas prices. While oil prices have only slightly gained from market lows, the outlook for energy is slowly improving with many commodity prices gaining across the market.
In 2017, natural gas prices have averaged around $4.20 per thousand cubic feet, gaining from 2016’s average price of $3.50 per thousand cubic feet. Some speculators believe natural gas may have further to gain in 2018 as it remains far from highs in the $12 range reported in 2008.
Therefore, adding exposure to natural gas may make sense as part of a well-diversified investment strategy. For investors, there are several natural gas exchange-traded funds (ETFs) that can be used for simplified investment in the commodity. Here’s a look at the three most actively traded natural gas ETFs for potential investment in 2018.
Note: Funds were chosen strictly on the basis of average daily trading volume. Year-to-date (YTD) performance figures are as of November 30, 2017 unless otherwise noted.
Assets under Management: $1.03 billion
Average Daily Volume: 20.97 million
As the name suggests, this is a 3x leveraged exchange-traded note (ETN). It tracks global OECD natural gas. UGAZ is tied to the S&P GSCI Natural Gas Excess Return Index, which tracks gains or losses from changes in futures contract prices and returns from rolling the contracts.
Note, this ETN is intended for short-term investing, even day trading, as a vehicle for exposure to the global natural gas market. Three-year annualized returns were -82.71%.
Issuer: U.S. Commodity Fund
Assets under Management: $550.96 million
Average Daily Volume: 8.59 million
UNG holds natural gas futures contracts and swaps, making it highly sensitive to movement in natural gas prices. Its benchmark is natural gas futures contracts on the NYMEX, which is tied to the Henry Hub spot price.
This fund isn’t really a “buy and hold” pick—investors must be willing to track fluctuations in market price in order to turn a profit on futures. Its expense ratio is also fairly steep, dragging down overall returns. However, this ETF does give you clean access to the dominant player in the natural gas futures market.
Annualized returns since inception in 2007 are -32.53% as of September 30, 2017, reflecting the overall volatility of energy prices. One-year, three-year and five-year annualized returns through November 30, 2017 are -28.23%, -34.22% and -21.57%, respectively.
Assets under Management: $130.7 million
Average Daily Volume: 4.45 million
This ETN takes the inverse position and is opposite the VelocityShares 3x Long Natural Gas ETN. It is a tactical vehicle intended for intraday trades as opposed to long-term investing. As an inverse leveraged fund, DGAZ provides -3x exposure to the S&P GSCI Natural Gas Index for a one-day period, which means that holding the note for more than a day may result in returns that vary greatly from the -3x long-term position due to compounding.
The fund’s inception date is February 7, 2012. It has a one-year return of 10.66%. Its three-year annualized return is 18.48%.