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Cold Wave Forecast Sparks Rally in Natural Gas ETFs

Natural gas spiked more than 10% to its highest in over a week on Dec 13 and will likely rise further on forecasts of colder-than-normal weather.

To tap this trend, investors could bet on natural gas ETFs that deal directly in the futures market. These are United States Natural Gas Fund UNG, United States 12 Month Natural Gas Fund UNL and iPath Bloomberg Natural Gas Subindex Total Return ETN GAZ. These funds have the potential to perform well with rising natural gas prices.

The cold snap is expected to start next weekend and peak on Christmas in most parts of the United States. Intense cold weather will spur heating demand in homes and businesses, potentially driving natural gas demand for heating and thus bolstering natural gas prices. Investors should note that November-March is generally the peak demand period for gas consumption in the United States.

According to NatGasWeather, well below-normal temperatures are expected across most of the lower 48 states from Dec 17-21 (read: Pain or Gain Ahead for Energy ETFs?).

The gains in natural prices came despite Freeport LNG's announcement last week that it will delay the planned restart of its liquefied natural gas (LNG) export plant in Texas from mid-December to the end of the year. The delay will push LNG exports lower and leave more gas in the United States for domestic use.

United States Natural Gas Fund (UNG)

United States Natural Gas Fund provides direct exposure to the price of natural gas on a daily basis through futures contracts. If the near-month contract is within two weeks of expiration, the benchmark will be the next month contract to expire. The natural gas contract is natural gas delivered at the Henry Hub, LA.

United States Natural Gas Fund has an AUM of $531 million and trades in a volume of around 7 million shares per day. UNG has 1.11% expense ratio (read: Top-Performing ETFs of Thanksgiving Week).

United States 12 Month Natural Gas Fund (UNL)

United States 12 Month Natural Gas Fund seeks to offer natural gas exposure without using a commodity futures account. The investment objective of UNL is to reflect the daily changes in the price of natural gas delivered at the Henry Hub. Its benchmark is the near-month futures contract to expire and the contracts for the following 11 months, for a total of 12 consecutive months. If the near-month futures contract is within two weeks of expiration, the benchmark will be the next month contract to expire and the contracts for the following 11 consecutive months.

United States 12 Month Natural Gas Fund has accumulated $32.8 million in its asset base and charges 90 bps as annual fees. The product trades in a light average daily volume of 28,000 shares.

iPath Bloomberg Natural Gas Subindex Total Return ETN (GAZ)

iPath Bloomberg Natural Gas Subindex Total Return ETN provides exposure to the Bloomberg Natural Gas Subindex Total Return, which consists of the contract in the Bloomberg Commodity Index Total Return related to natural gas.

iPath Bloomberg Natural Gas Subindex Total Return ETN is unpopular and illiquid, with an AUM of $15.2 million and an average daily volume of 28,000 shares. The expense ratio comes in at 0.45%.

Investors should note that ETNs are unsecured debts issued by a major bank. Unlike ETFs, ETNs do not hold any securities. Instead, the issuing bank promises to pay investors the amount reflected by the index’s performance minus fees (read: ETFs vs. ETNs: Why You Need to Know the Difference).

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iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ): ETF Research Reports

United States 12 Month Natural Gas ETF (UNL): ETF Research Reports

United States Natural Gas ETF (UNG): ETF Research Reports

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Zacks Investment Research