Natural gas exchange-traded funds (ETFs) provide investors with exposure to natural gas prices while avoiding both the complexities of trading natural gas futures contracts and the storage costs to hold the physical commodity. Natural gas is a commodity used as a source of energy for heating, cooking, fuel, and electricity generation. It also is used in the manufacture of plastics and other organic chemicals. The price of natural gas rises and falls according to fluctuations in supply and demand.
Key Takeaways
- Natural gas prices have risen at a faster pace than the S&P 500 over the past year.
- The three natural gas ETFs, ranked by 1-year trailing total return, are UNL, UNG, and GAZ.
- All three of these ETFs hold natural gas futures contracts to gain exposure to natural gas prices.
There are three natural gas ETFs that trade in the U.S., excluding inverse and leveraged ETFs. These are funds that hold natural gas as a commodity or commodity futures, not the stocks of natural gas companies. Natural gas prices have risen 54.6% over the past 12 months compared to the S&P 500’s total return of 50.0%, as of May 6, 2021. While natural gas prices have risen faster than the S&P 500, natural gas ETFs have dramatically lagged both natural gas prices and the broader stock market. The best performing natural gas ETF, based on performance over the past year, is the United States 12 Month Natural Gas Fund (UNL). We examine the three natural gas ETFs below. The sole holding for each fund below is natural gas futures. All numbers below are as of May 15, 2021.
ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs which can negate some of your investment gains or increase your losses.
- Performance over 1-Year: 6.6%
- Expense Ratio: 0.90%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 10,300
- Assets Under Management: $8.9 million
- Inception Date: Nov. 18, 2009
- Issuer: Concierge Technologies
UNL is structured as a commodity pool, a private investment structure that pools investor contributions in order to trade futures and options in commodities. The fund holds natural gas futures contracts in order to gain long exposure to natural gas prices. It diversifies its holdings across multiple maturities to mitigate the adverse impact of contango. The ETF may be appealing to investors as a hedge against inflation.
- Performance over 1-Year: -7.0%
- Expense Ratio: 1.33%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 2,920,806
- Assets Under Management: $245.6 million
- Inception Date: April 18, 2007
- Issuer: Concierge Technologies
Like UNL, UNG is also structured as a commodity pool, offering exposure to natural gas prices by holding natural gas futures contracts. Unlike UNL, however, this ETF is not as diversified, investing in futures contracts set to expire within the next month. This means the fund is more exposed to the adverse impacts of contango and is thus more appropriate for traders with a short-term strategy. It may also be appealing as an inflation hedge.
- Performance over 1-Year: -8.0%
- Expense Ratio: 0.45%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 2,103
- Assets Under Management: $3.6 million
- Inception Date: March 8, 2017
- Issuer: Barclays Capital
GAZ is structured as an exchange-traded note (ETN), a type of unsecured debt security that does not make interest payments and has stock-like characteristics. The fund provides exposure to natural gas prices through the holding of natural gas futures contracts. As an ETN, GAZ exposes investors to the credit risk of the issuer. Also, this ETN doesn’t generally move with changes in spot natural gas prices because the underlying index is comprised of futures contracts. It is designed for investors with a short-term investment horizon, rather than as part of a buy-and-hold strategy.
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