iPath Debuts Seasonal Natural Gas ETN (DCNG)

by on April 24, 2011 | ETFs Mentioned:

iPath has introduced its Seasonal Natural Gas ETN (DCNG), giving investors yet another way to gain exposure to natural gas prices through exchange-traded products. The new ETN will be linked to the Barclays Capital Natural Gas Seasonal TR Index, a benchmark that is designed to reflect the returns that are potentially available by maintaining an unleveraged investment in a rolling position in Henry Hub Natural Gas futures contracts plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

The index linked to the new ETN is composed of a single contract that expires in December and rolls annually. In October of each year the underlying index closes out the position in the current year contract and rolls into a natural gas futures contract expiring in December of the next year. Natural gas futures contracts are traded on the NYMEX, with contracts available monthly for the current year and the next 12 years. Recently, the December 2011 contract was trading at a premium of about 13% to the May contract.

DCNG is the fifth exchange-traded product that offers investors exposure to natural gas futures contracts; in aggregate, natural gas ETFs have more than $2 billion in AUM. Other natural gas ETPs include:

  • United States Natural Gas Fund (UNG): The most popular option for natural gas exposure, this ETF invests in front month contracts and rolls holdings on a monthly basis. That makes UNG appealing to investors looking for short term exposure, but increases the potential impact of contango or backwardation on returns.
  • United States 12-Month Natural Gas Fund (UNL): This ETF spreads exposure across near month contracts as well as contracts for the next 11 months. This strategy results in a lower roll yield and lower trading costs, but UNL will generally also exhibit lower sensitivity to movements in spot natural gas prices.
  • Teucrium Natural Gas Fund (NAGS): This ETF takes yet another approach, seeking to minimize roll yields and deliver returns more reflective of changes in spot natural gas prices over the long term. NAGS spreads exposure across four separate contracts, investing equally in nearest to spot month March, April, October and November Henry Hub Natural Gas Futures Contracts traded on the NYMEX [see Q&A With Sal Gilbertie: NAGS vs. UNG].

iPath also offers the Dow Jones-UBS Natural Gas ETN (GAZ), which offers exposure to an index consisting of near-month natural gas contracts. iPath suspended creations of GAZ in 2009, and recently the ETN has been trading at a significant premium to its net asset value [see Natural Gas ETFs: Seven Ways To Play].

[For more on the new natural gas ETN, see the DCNG fact sheet. For updates on all new ETFs, sign up for our free ETF newsletter.]

Disclosure: No positions at time of writing.