what is a natural gas etf 
a natural gas exchange traded fund etf is a type of pooled investment product that provides investors with exposure to natural gas prices these funds are often overseen by a professional manager who invests on behalf of the investors and tend to invest in a basket of natural gas futures contracts rather than hold stocks of natural gas companies understanding natural gas etfsnatural gas is a commodity that serves many purposes it is used as a source of energy for heating cooking fuel and electricity generation as well as to manufacture plastics and other organic chemicals it is important for investors to understand the difference between natural gas etfs and other popular types of etfs many etfs own their underlying assets directly such as gold etfs that own physical bullion or industry sector etfs that own the shares of companies operating in their industry natural gas etfs however do not usually own any physical natural gas instead they own natural gas indirectly by purchasing natural gas futures contracts that trade on a commodities exchange the profitability of a natural gas etf is therefore dependent on the overall price direction of natural gas based on the trading that takes place on the commodities exchange the price of natural gas rises and falls according to fluctuations in supply and demand 1diversity of natural gas etf holdingsnatural gas etfs offer investors a range of strategies to gain exposure to the natural gas market most hold futures contracts though there are other opportunities listed below that also expose investors to the industry some natural gas etfs hold physical natural gas in storage facilities these funds purchase and store actual natural gas typically in the form of futures contracts and aim to track the spot price of the commodity investing in physical natural gas can provide a more direct and straightforward exposure to the commodity s price movements though there are obvious and significant carrying costs to this type of investment vehicle instead of holding physical natural gas many natural gas etfs use futures contracts to track the price of natural gas these funds invest in natural gas futures which are agreements to buy or sell the commodity at a predetermined price at a specified future date futures based etfs can provide exposure to short term price movements and can be more liquid than physical natural gas etfs some natural gas etfs invest in the equities of companies involved in the natural gas sector these companies can include natural gas producers exploration and production companies pipeline operators and utilities by investing in equities these etfs provide exposure to the broader natural gas industry and can be influenced by factors beyond just the price of natural gas last there are leveraged and inverse natural gas etfs leveraged etfs aim to amplify the returns of the underlying asset typically on a daily basis inverse etfs on the other hand seek to provide returns that are the opposite of the underlying asset s performance these etfs are more complex and are generally used for short term trading or hedging strategies 2natural gas etfs and forward contractsas mentioned several times above natural gas etfs may use forward contracts as part of their investment strategy to gain exposure to the natural gas market unlike futures contracts which have standardized terms forward contracts are individually tailored to meet the specific needs and objectives of the parties involved forward contracts offer more flexibility in terms of settlement dates and contract terms this flexibility allows etfs to better match their exposure to the desired investment horizon forward contracts are also typically traded in the over the counter otc market meaning they are not as liquid or regulated as futures contracts traded on exchanges this can provide etfs with alternative ways to gain exposure to natural gas but it also introduces counterparty risk as they are directly dealing with another party with very specific risks 3to manage counterparty risk etfs using forward contracts often require the posting of collateral by the counterparty this collateral can serve as a security against potential default ensuring that the terms of the contract are fulfilled also etfs using forward contracts may need to roll over their positions as contracts approach their expiration dates this involves closing out the existing contract and entering into a new one with updated terms limitations of natural gas etfsbecause natural gas etfs hold futures contracts they are exposed to a special type of risk called contango each month the manager of the natural gas etf has to purchase new futures contracts to replace the old contracts that expire the new contracts tend to have slightly higher prices than the old ones meaning that each time contracts are replaced extra costs are incurred by the fund manager over time these small costs can add up to create a large drag on the fund s overall performance 4for this reason investors will generally avoid relying on natural gas etfs as a type of long term investment vehicle because of contango risk an investor could incur significant costs from the ongoing roll over of futures contracts meaning that even if natural gas prices do rise over their investment period they might not rise enough to make the overall investment profitable most investors seeking exposure therefore use natural gas etfs mainly as a short term trading vehicle so that the costs of contango do not accumulate enough to have a meaningful impact there are two natural gas etfs that trade in the u s excluding inverse and leveraged etfs as of dec 2023 5example of a natural gas etfone example of a widely traded natural gas etf is the united states natural gas fund this fund is primarily composed of natural gas futures contracts that are set to expire within the next month and trades on the new york mercantile exchange nymex as ung its goal is to reflect the daily changes in percentage terms of the price of natural gas delivered at the henry hub louisiana a natural gas pipeline that serves as the official delivery location for futures contracts on the nymex 6the united states natural gas fund is very sensitive to fluctuations in natural gas prices so investors need to watch market prices closely to try to yield a profit over the past 20 years natural gas prices have ranged between a high of 22 reached in the fall of 2005 to just under 2 reached in september of 2020 7ung offers exposure to commodities without the need for a dedicated commodity futures account providing features like intraday pricing as well as the ability to place market limit and stop orders additionally ung maintains transparency by regularly updating its website with information on portfolio holdings market price net asset value nav and total net assets tna as of sept 2023 the management fee is 0 60 the total expense ratio is 1 06 and the 1 month net asset value was 4 08 6