ETPs For Trading Natural Gas

by on April 19, 2012 | Updated December 8, 2014

Natural gas has been one of the most frustrating commodities this year, as investors have attempted to call its bottom again and again, only to watch it fall to new lows. NG futures have sank by more than 35% this year, as a warm winter coupled with large deposits of the resource have put major pressure on prices. As such, most investors have abandoned their NG positions, as it is wildly unpredictable and extremely volatile, but it is these current behaviors that presents a juicy opportunity [see also 25 Ways To Invest In Natural Gas].

Traders often seek volatile funds as they have the potential to provide massive returns in a very short period of time. Of course, they can also lead to excruciating losses when positions turn sour. But when it comes to natural gas, futures contracts can be especially dangerous and are typically outside of the realm of your average investor. Enter ETFs. There are now a number of ETFs specifically dedicated to betting on the future on natural gas, whether you think it will appreciate, or if it will continue its massive decline. Basic logic tells you that with its use becoming more prevalent as a fuel, NG will eventually find a level where it can find support, but finding where that is seems like an impossible task [see also Why You Should Invest In Natural Gas: The Fuel of the Future].

Those who have been unfortunate to hold a long position in the United States Natural Gas Fund LP (UNG), the most popular natural gas ETF, have been treated to losses of 43% on the year and losses of more than 87% in the trailing three year period. But for those who feel strongly about where this commodity is headed, there are a number of ETPs that offer exposure to this fossil fuel, allowing investors to make bets on its uncertain future. Note that these products are meant for trading, so if you’re going to hold one for an extended period of time, be sure to carefully monitor your position and stop-loss orders are an absolute must. Below, we outline four ETPs for trading natural gas [see also Understanding Contango: Natural Gas Example].

Ultra DJ-UBS Natural Gas (BOIL)

This ProShares ETF adds a 200% leverage to NG futures, meaning that it will fall prey to contango each month. 2012 has watched this fund drop by nearly 70%, as natural gas has failed to establish any upward momentum. If this commodity is able to turn things around, BOIL will be the place to be, but for now, proceed with caution as this ETF has had a tough time in the past few weeks [see also Beyond UNG: Three Intruiging ETFs To Play Natural Gas].

UltraShort DJ-UBS Natural Gas (KOLD)

KOLD is the bear sister fund to BOIL, as it employs a -200% leverage to NG. So what do the returns look like for a fund of this nature? 2012 has watched KOLD jump by 142% and the last six months have seen gains of 304%, numbers that most investors only dream of. Be careful, however, because this fund is at a very high level. Entering a position now, if NG is slated to recover, could be devastating.

3x Long Natural Gas ETN (UGAZ)

This fund was released earlier this year and employs a 300% leverage to NG futures. While its strategy will provide jaw-dropping results in a bull market, the fund has lost about 66% since inception. UGAZ is trading around 10,000 shares each day, so a limit order is your best bet when entering a position in order to ensure that you don’t get burned by large bid/ask spreads [see also What Is Contango?].

3x Inverse Natural Gas ETN (DGAZ)

The sister fund to UGAZ, this ETN utilizes a -300% leverage on NG futures and has been on a tear since day one. DGAZ is up roughly 126% since inception, and figures to keep those gains until natural gas turns things around. But be ready, if this commodity is able to rally, your gains could be erased in a matter of days, so an exit strategy is a must. Also note that DGAZ trades only 7,000 times each day, so it too demands a limit order.

Disclosure: Long DGAZ.