Finding a Better Natural Gas ETF: Exploring NAGS

by on January 16, 2013 | ETFs Mentioned:

Natural gas ETFs are some of the hottest picks in the exchange-traded space, as many feel that this commodity will have a significant role in our future energy use. For plain vanilla, futures-based exposure, investors have long turned to the United States Natural Gas Fund (UNG). While UNG may be one of the most liquid funds in the space, it is, in fact, one of the worst performing ETFs in history and has earned a relatively negative name for itself.

Enter the Teucrium Natural Gas Fund (NAGS). This young fund hit the market in February of 2011 bearing a strategy not seen before in the NG world. At first glance, many were warded off by NAGS’s 150 basis point fee, but a closer comparison with other natural gas ETFs paints one clear winner. For the calendar year 2012 (a notably poor stretch for this commodity) NAGS lost 16.57%. Compare those losses to UNG’s -26.85% performance and UNL’s -18.37% and NAGS takes the cake, even after factoring in expenses.

Recently, we had the opportunity to speak with Sal Gilbertie of Teucrium to get a better idea on how NAGS has been able to outdo its competition by such a notable margin.

ETF Database (ETFdb): Introduce us to NAGS. What sets this fund apart from its competitors?

Sal Gilbertie (SG): It’s a long unleveraged fund with a benchmark that caters to long-term asset allocators. NAGS is designed to give long-term exposure for investors by holding four contracts out on the natural gas futures curve. Physical gas trades in a closed system; it is never exposed to air from wellhead to burnertip.

Physical gas is stored during the summer, when production exceeds consumption, and tapped in the winter when the production and consumption levels are reversed. March, April, October and November are what they call shoulder months, when the gas tends to start being placed into storage (spring), and when it’s being drawn out of storage for winter use (fall) [see also Everything You Need To Know About Commodity ETFs].

Knowing that we only want to trade the shoulder months allows our ETP to just have four components and hold these components for the long term. Because of my experience as a gas trader, I believe Teucrium has designed a fund that is very efficient and liquid that benefits both investors and arbitragers.

ETFdb: Can you explain how NAGS does a good job avoiding contango, something that seems to be a big issue in the natural gas space?

SG: I think the reason that NAGS is the superior benchmark, when compared to other unlevered funds, is that we don’t trade spot. We know the natural gas trading curve better, and trading those four shoulders reflects the prices along the curve better than other methodologies out there [see also Understanding Contango Through Natural Gas Futures].

ETFdb: Can you detail how NAGS was able to outperform the space in 2012?

SG: Any benchmark that just reflects the monthly spot price is only going to show the short-term price anomalies, which works very well for short-term and overnight traders. But it may not be the most efficient benchmark for buy-and-hold investors in a contango market, and natural gas is often steeply contangoed for long periods of time.

People who want to allocate money to sectors that they think will outperform, are going to look for contango mitigaters, funds that hold the forward curve, avoid spot prices and trade in contracts that the professional commodity traders pick. That’s what we have with NAGS, and that’s what has allowed it to perform the way it has.

ETFdb: Why is NAGS’ low asset base not a liquidity problem for prospective investors?

SG: Natural gas futures are an incredibly deep market; they trade millions and millions in notional value a day. Because the arbitrage is so easy along with how long the futures markets are open, an investor can get very efficient pricing on a large block of shares. There is also the fact that we can continually create shares, which will rise with demand, so that the price of NAGS is affected only by the price of gas, not by demand for NAGS shares.

As investors go up the learning curve, and many groups are figuring this out now, if you pay attention to the indicative value and put in limit orders, liquidity will not be a problem. One of the reasons for NAGS’s small size is that 2012 was its first full calendar year, but now that the fund has been around for a while, and its superior track record is established, it will start to appear on investors’ radars. When it comes time for asset allocators to re-weight natural gas in their portfolios, I think NAGS is going to be a big beneficiary.

Follow me on Twitter @JaredCummans

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Disclosure: No positions at time of writing.