On Sept. 5, natural gas traders got a taste of two key factors to consider when investing in the commodity: supply and demand.
The most actively traded benchmark U.S. natural gas futures contract jumped more than 5% as the Energy Information Administration said inventories rose less than expected and a weather forecasting service said much of the following week would be warmer than earlier thought.
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Weather is a big factor affecting natural gas prices, as more air conditioning in the summer or heating in the winter takes more electricity, which is often generated using natural gas.
As for the supply side, inventories are crucial to watch. Natural gas in the U.S. is in oversupply that is keeping the price around $2 per million British thermal units. But fluctuations around that level are where traders can make money in the short term.
“The U.S. natural gas market is currently working through a sizable supply surplus,” says John Berman, founder and chief investment officer at natural resources investment management company Berman Capital Group. “Current prices have caused many major producers to curtail some production until that surplus has been worked through.”
For U.S. gas, exports are important. Natural gas prices are much lower in the U.S. than they are in Europe and Asia, so companies export natural gas in super-chilled liquid form to those destinations, selling to the highest bidder. These exports of liquefied natural gas, or LNG, may help boost U.S. natural gas prices in the long term as additional LNG exporting capacity comes on line.
U.S. natural gas has become especially important for Europe as it tries to ween itself from Russian energy sources amid the war in Ukraine.
More broadly, governments around the world will continue to rely on natural gas to generate stable baseload electricity as they build out renewable energy sources such as solar and wind that offer green, but intermittent, power.
It’s this role as a bridge fuel amid the global energy transition away from coal that promises to provide long-term demand for natural gas.
“Over time, our view is that prices will trend higher as U.S. LNG and pipeline gas exports grow and more U.S. generators move from coal to gas,” says Jason Feer, global head of business intelligence at consultancy Poten & Partners. “But for the time being, it looks like U.S. gas prices will remain moderate, and that should help exports as well as domestic consumers.”
How to Invest in Natural Gas
People who want to invest in natural gas can turn to futures, which are contracts to buy or sell a certain amount of gas at a certain price at a specified time in the future. But trading futures will require special permission from your broker and involves understanding the risks associated with margin.
Investors can also gain exposure to natural gas futures through funds that trade like stocks, or exchange-traded funds (ETFs). That’s where the first four funds on this list come in. You can also invest in natural gas through funds holding stocks of producers and utilities.
Owning companies instead of futures allows investors to not only take advantage of long-term share price gains, but also to benefit from share buybacks and dividends, which futures don’t provide.
Investing in funds of equities, such as the last two funds on this list, disperses the risk of owning individual stocks. But these funds also won’t likely perform as well as an individual company that’s doing very well.
Let’s take a look at these six natural gas funds:
| Natural Gas ETFs/Funds | Expense Ratio |
| United States Natural Gas Fund LP (ticker: UNG) | 1.01% |
| United States 12 Month Natural Gas Fund LP (UNL) | 1.71% |
| ProShares Ultra Bloomberg Natural Gas (BOIL) | 2.11% |
| ProShares UltraShort Bloomberg Natural Gas (KOLD) | 1.66% |
| Hennessy Gas Utility Fund (GASFX) | 1.00% |
| First Trust Natural Gas ETF (FCG) | 0.60% |
United States Natural Gas Fund LP (UNG)
This fund and the three that follow are based on natural gas futures. It’s much less of a hassle to buy one of these funds than it is to trade futures contracts, but you should also understand that they aren’t designed to be held for long periods.
These funds don’t take delivery of natural gas. Instead, they roll over futures contracts. Because futures contracts that expire further out are often more expensive than the one the funds are holding, the funds lose money on that rollover.
That doesn’t mean these funds are bad; it just means that they’re designed to express views about whether natural gas prices will rise or fall over short periods. You may not want to hold these funds for longer than one day.
UNG invests in front-month futures contracts for natural gas that are traded on the New York Mercantile Exchange, or NYMEX, and it can invest in forwards and swaps. It rolls expiring near-month contracts over to the next month.
United States 12 Month Natural Gas Fund LP (UNL)
Like UNG, this fund invests in front-month natural gas futures, but it also invests in contracts for the following 11 consecutive months.
It calculates the daily movement of the average price of those 12 contracts, weighting each month equally. UNL can also invest in forwards and swaps.
Again, this fund is for tracking daily returns. That means investors can get exposure to the intraday movements of natural gas without the hassle of buying or selling futures contracts themselves. But they’ll likely see a tracking error if they hold the fund for longer than a day, with that error magnifying the longer they hold the fund.
ProShares Ultra Bloomberg Natural Gas (BOIL)
This fund is for investors who are extra bullish on natural gas. Like UNG, it focuses its investments on the near-month NYMEX natural gas contract, but it uses leverage to offer twice the daily movement of a sub-index that tracks natural gas prices.
That extra oomph makes BOIL a useful tool for day traders, but again, daily compounding of returns means that this fund isn’t suitable for long-term investors who are simply trying to track the price of natural gas.
While much of the commentary here relates to futures-based funds not being suitable for long-term investments, people who are convinced that natural gas prices will go their way could decide to hold these funds longer than one day. If their conviction is correct, the tracking error will compound in their favor. But remember that commodities markets are notoriously volatile and hard to time.
[READ: 7 Best Natural Gas Stocks and Funds to Buy]
ProShares UltraShort Bloomberg Natural Gas (KOLD)
This fund is the opposite of BOIL. It seeks to provide two times the inverse, or -2x, the daily performance of the same natural gas sub-index as BOIL.
That means it’s geared toward investors who think natural gas prices will fall. That can happen if inventory numbers come in higher than expected or if winters are warmer than forecast or summers cooler than originally thought.
Hennessy Gas Utility Fund (GASFX)
Now let’s turn to funds that invest in natural gas stocks rather than derivatives.
This mutual fund invests in members of the American Gas Association that are in the AGA Stock Index, with a goal of tracking the index performance by more than 95%. It invests in the companies in roughly the same proportion as they are in the index, and no company represents more than 5% of the fund’s assets.
More than 60% of the companies in the portfolio are in the utilities sector, while the next-biggest chunk is classified as being in the energy sector.
First Trust Natural Gas ETF (FCG)
This ETF also tracks an index, which is made up of companies that make most of their money from the exploration and production of natural gas. It has 44 holdings, with its top holding accounting for 5.4% of its assets, excluding cash. Its expense ratio is notably lower than the fees of others on this list, at 0.6%.
Like some of the holdings in the aforementioned Hennessy fund, companies in FCG often are also involved in the oil industry because natural gas and crude are often produced together.
As a fund of exploration and production companies, FCG may offer a more aggressive way to play the natural gas market, while GASFX might be more on the defensive side.
Utilities are often considered defensive assets because they can hold their value better than other types of companies in an economic downturn. This is because people are going to need natural gas and electricity regardless of the state of the economy.
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6 Natural Gas ETFs and Funds to Buy in 2024 originally appeared on usnews.com
Update 09/06/24: This story was previously published at an earlier date and has been updated with new information.
