A surprising group of winners YTD have been natural gas ETFs. Natural gas futures prices have risen to the highest levels in two years, driven by a combination of factors. Those include extreme weather conditions, limited supply, and record liquified natural gas (LNG) exports after the moratorium imposed by President Biden was lifted. Natural gas future prices are trading above $4.35 per million BTUs.
Natural Gas ETFs have been a key beneficiary of these trends, with the ProShares Ultra Bloomberg Natural Gas ETF (BOIL ) up more than 81% YTD, along with the non-levered United States Natural Gas Fund (UNG ) and the United States 12 Month Natural Gas Fund (UNL ), which have gained 38.5% and 33.2%, respectively.
UNG tracks the Henry Hub, Lousiana futures prices of near-month contracts traded on the NYMEX. At the same time, UNL seeks to mitigate the adverse effects of contango by diversifying across multiple futures contracts. UNG is the more popular of the two approaches with $480 million in assets versus $18 million in UNL. UNG has also outperformed YTD despite being more susceptible to the contango effect, which can significantly impact long-term returns.
For investors seeking a levered bet on natural gas prices, BOIL offers 2X the daily performance of the Bloomberg Natural Gas Subindex.
Interestingly, ETFs holding natural gas equities, like the First Trust Natural Gas ETF (FCG ), have failed to participate in the natural gas futures price action, trailing the overall equity market. FCG is down 5.7% versus the VettaFi 500 TR Index return of -5.0%.
Will the Trend Continue?
Cold weather conditions have driven up natural gas consumption for heating amid continued supply constraints related to sanctions against Russia after its 2022 invasion of Ukraine. The Trump administration’s recently imposed tariffs on Canada could further disrupt supply to the U.S. as Canada is a major natural gas exporter. LNG demand has also been rising as a cleaner energy alternative to coal, and forecasts expect Asia LNG demand to double between now and 2050, fueled by increasing usage in South and Southeast Asia. The U.S. has the potential to comprise as much as a third of that supply by 2035, posits a study by Wood Mackenzie.
Right now, the U.S. is the largest exporter of LNG in the world, and China is the largest LNG importer, placing liquified natural gas in the tariff crossfire. The Alerian Liquified Natural Gas Index (ALGNX), an index of stocks with significant operations in the liquified natural gas industry, is down 4.7% for the year, but long-term trends remain extremely favorable.
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VettaFi LLC (“VettaFi”) is the index provider behind the Alerian Liquified Natural Gas Index, which is not currently licensed as an ETF. For more information about the index, click here.
