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unNatural Gas ETF – (UNG) is This for Real?

November 16, 2009

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 problem is that there is an usually high level of contango with natural gas and this fund is caught in the crossfire. Also, the number of shares for this fund is enormous. That is a problem as the CFTC is trying to limit this. If you recall, the shares were no longer allowed to be issued not too long ago.

I am not sure of another ETF that is a pure play, but concede that while (UNG) does have some volatile ups and downs – you can still make money on it. Just remember that this is in no way linked to natural gas any longer as can be seen by the chart below. (May-09 to present)

Nat Gas vs UNG 20091113

It is unclear if this divergence will be resolved to where it was back in May-09. There are three schools of though here:

1) Reversion to the mean – (UNG) will come back in line with the natural gas pricing when (if) there is a the contango spread reduces to historic levels.

2) This fund is just too big and because futures roll every month, there is no way that this can ever catch up. The unlimited number of shares that it can issue will hold it back as well.

3) Use it for trading only.

Thoughts?

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Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

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Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

Written by Andrew Horowitz · Filed Under Economy, Markets, Stocks, Strategy 

Comments

5 Responses to “unNatural Gas ETF – (UNG) is This for Real?”

  1. rr5555 on November 16th, 2009 5:29 pm

    cover and don''t talk from agenda and position.

  2. Andrew Horowitz on November 16th, 2009 6:07 pm

    English please …
    We do not have a position

  3. Mazama on November 17th, 2009 7:56 pm

    Good presentation Mr. Horowitz.. Thanks.

    It seems to me that several of these commodity ETFs are failing to be the "poor man's" commodity play that they were initially hyped as being. My (scattered) reading is that problems fall into two categories: 1) a design flaw (which UNG seems to have) that prevents it from reallt tracking the commodity beyond a day at a time or 2) a execution flaw that makes their moves predictable and thereby allows independent commodity traders to fleece the ETF shareholders. As usual the ETF makes money whether it delivers or not because they charge a percentage of assets.

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  5. Natural Gas ETF (UNG) – All Time LOW, and Going…… : The Disciplined Investor on December 3rd, 2009 2:47 pm

    [...] inception (Unless you were/are short ). The causes for the under-performance have been discussed here before and there is no reason to believe that there will be a change anytime [...]

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