SubscribeETF Death by Contango
June 15, 2009
We have been desirous of buying oil and eventually we may want to look into Natural Gas. There is a problem though… Contango. This creates a problem for anyone investing in oil or several other commodity investments, especially when investing through ETFs and ETNs.
The reason is that the wider the Contango spread, the more potential that the monthly roll to the forward future will chip away at share value for an ETF and an ETN. Below is a story that discusses this from Bloomberg as well as a chart that we put together that shows just how badly the Natural Gas investment (UNG) has done comparably.
By Asjylyn Loder
June 12 (Bloomberg) — The United States Natural Gas Fund, the first and largest exchange-traded fund for the fuel, attracted record volume yesterday as investors bet rising prices will reward them with a comparable return. They may be setting themselves up for a disappointment.
The fund doesn’t try to match the spot price of the commodity. Its goal is to follow the percentage change in the price of the commodity’s front month contract, said John Hyland, portfolio manager and chief investment officer of the fund. When the market is in contango, meaning the near month contract is cheaper than the contracts further out, the fund will underperform the underlying commodity, he said.
Investors see “natural gas” in the name of the fund and assume the fund mimics the commodity’s performance, said Paul Justice, an ETF strategist at Morningstar Inc. in Chicago. That’s not the case.
“It’s a horrible investor experience if you believe gas prices will go up, and they went up, and you still didn’t make money,” said Justice in an interview. “You just didn’t do your homework. The ETF is doing what it said it was going to do. You just didn’t find the right product.”
The chart below shows how severely UNG underperformed the actual commodity. This is a good lesson to anyone who invests in a commodity based exchange traded investment as Contango can be a major drag on performance.
(Click to enlarge)
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Comments
10 Responses to “ETF Death by Contango”
Got something to say?
I'm swing trading UNG, so the contango doesn't matter that much. Recently in at 12.85, then out at 17; back in at 14.25, and I just took 1/3 off at 15.25 and moved my stop up to break-even.
I was actually playing the contango in the Oil ETFs by buying DBO and shorting OIL, as OIL did a much worse job at rolling. You can type "DBO:OIL" into stockcharts.com and see what I mean – see the "high contango" period from July'08 until Feb'09. Lately that contango has pretty much fizzled out, though, so I took the trade off.
I wonder if there is a way to profit from the congango in UNG??
–joe
–
We are entering a small spread of ung:USO as some of contango will me covered by short oil
But cannot for ira accounts
A
I thought that to overcome the contango problem for crude oil I could use USL or DBO instead of USO. But for natural gas I think there is no worth long term ETF investment, because UNG has a similar problem to USO.
One nice investment could be to have a short position in USO and a long one in USL or DBO. Does anyone of you know an on line broker which let use the money of the short position for buying a long position?
It would seem that the contango with both oil and nat gas should have offset
But it is a pricing issue now and this weekends rouge oil trader story as well as record supplies of diesel and gasoline should make se take notice
Still , nat gas is ridiculously low and may spark a switch to that furl if oil is staying above $60
Andrew
With gas price not changed over the last three month (Jul – Oct 2009), UNG lost over 15% in price over the same period….hope someone may catch them for misleading investors… they make it look like on their webpage that they track gas sport price….when they don't !
[...] The chart below sure tells us what is happening with (UNG) – the biggest natural gas related ETF available. Look at the differential between the Natural Gas pricing (futures) and the ETF (UNG). We have written about this before HERE. [...]
[...] The chart below sure tells us what is happening with (UNG) – the biggest natural gas related ETF available. Look at the differential between the Natural Gas pricing (futures) and the ETF. We have written about this before HERE. [...]
[...] correlated with spot prices, the performance in certain environments can deviate significantly (see this article for a more in-depth [...]
[...] correlated with spot prices, the performance in certain environments can deviate significantly (see this article for a more in-depth [...]
[...] The chart below sure tells us what is happening with (UNG) – the biggest natural gas related ETF available. Look at the differential between the Natural Gas pricing (futures) and the ETF. We have written about this before HERE. [...]