Teucrium Launches Natural Gas ETF (NAGS)

by on February 1, 2011 | ETFs Mentioned:

Teucrium, the issuer behind the only pure play corn ETF on the market, has doubled the size of its ETF lineup with the introduction of the Teucrium Natural Gas Fund (NAGS). The new fund will offer investors another option for gaining exposure to natural gas futures contracts through the exchange-traded structure.

Similar to CORN, NAGS will spread exposure to futures contracts across multiple maturities. The investment objective of the new fund is to reflect the daily changes in percentage terms of a weighted average of the following: the nearest to spot month March, April, October, and November Henry Hub Natural Gas Futures Contracts traded on the NYMEX, weighted 25% equally in each contract month. That structure is utilized in an effort to reduce the effects of contango and backwardation on fund returns. The diversified futures structure is designed to reduce the cost of rolling the investment when compared to other funds that hold only a single month.

NAGS becomes the fourth exchange-traded product to offer exposure to natural gas futures contracts [see all natural gas ETFs]. By far the most popular is the United States Natural Gas Fund (UNG), which has more than $2 billion in assets and trades an average of about 25 million shares per day. UNG invests in front month contracts, rolling its underlying holdings as they approach expiration to avoid taking possession of the physical commodity. That methodology creates a strong correlation between the ETF price and the spot commodity, but exposes investors to the potentially adverse impact of contango. When futures markets are upward-sloping the “roll” process can eat into returns, with more frequent rolls translating into a greater impact on bottom line returns. When futures markets are backwardated (i.e., longer-dated contracts are cheaper than those nearing expiration), regular rolls can enhance returns to commodity ETPs.

UNG has been one of the most popular commodity ETFs over the last several years and also one of the worst performers. The dismal returns are in part a result of fundamentals in the natural gas market–massive new discoveries have flooded the market with new supplies–but also attributable to contango in futures markets. Because the market for natural gas futures contracts is often contangoed–especially in the short-term–exchange-traded products offering exposure to the commodity have lagged far behind a hypothetical return on spot prices. In 2009, the U.S. natural gas wellhead price declined by about 22.5%; UNG lost more than 55% over that same period. It was the same story in 2010; UNG lost about 40%, considerably more than the decline in spot prices [see Worst ETF Performers of 2010].

Front month exposure isn’t the only option for investing in natural gas through ETFs; the 12 Month Natural Gas Fund (UNL) invests in next-to-expire futures as well as the next 11 contracts, spreading exposure evenly across the coming year. The introduction of NAGS gives investors another option–one that the folks at Teucrium believe offers a more efficient approach to investing in the fuel.

Commodity ETFs Combating Contango

Investors have expressed frustration with the perceived flaws with the “first generation” of commodity ETFs, citing the often considerable gaps between fund return and a hypothetical return on the spot price (such discrepancies are of course the result not of flaws in the ETFs, but rather reflect the nuances of any futures-based strategy).

After pulling in more than $30 billion in 2009, inflows into commodity products plummeted to about $11 billion last year. And almost all of those inflows were attributable to physically-backed precious metals products, likely a reflection of frustration with the performance of funds linked to futures-based benchmarks or investment strategies.

2009 2010
Gold SPDR (GLD) $13,801 $5,799
iShares Gold (IAU) $365 $1,620
ETFS Gold (SGOL) $320 $645
iShares Silver (SLV) $1,235 $1,200
ETFS Silver (SIVR) $135 $189
ETFS Platinum (PPLT) $0 $689
ETFS Palladium (PALL) $0 $599
All Other Commodity ETPs $14,249 $385
Total Inflows $30,105 $11,126
Source: NSX.com

Recent innovation in the ETF space has shown interest in identifying investment strategies that mitigate the adverse impact on contango on returns. Last year USCF rolled out the United States Commodity Index Fund (USCI), a product linked to an index that screens potential components by degree of contango/backwardation (among other metrics). USCI has blown away many of its primary rivals from a performance perspective, and has quickly gathered close to $150 million in assets. USCF has filed for approval to bring twists on that “contango killer” strategy to the metals and agriculture space [see Under The Hood Of USCI].

Separately, multiple issuers have sought approval for physically backed copper ETFs; ETF Securities has already debuted physical copper, tin, and nickel products in London.

Up Next: Crude Oil

Teucrium seemingly has plans to further expand its commodity lineup with the Teucrium WTI Crude Oil Fund (CRUD), though no launch date has been set. That fund is designed to reduce the cost of rolling the investment when compared to funds that hold only a single month, and will invest in NYMEX futures contracts for WTI crude oil across three maturities:

  • the nearest to spot June or December contract, weighted 35%
  • the June or December contract following the aforementioned, weighted 30%
  • the December WTI contract that immediately follows the aforementioned, weighted 35%

Disclosure: No positions at time of writing.