I read an interesting post at The Disciplined Investor on the Natural Gas ETF UNG.

If you bought the “natural gas” fund assuming that it would follow the commodity’s performance you would be wrong. Since last September, in fact, UNG underperformed significantly the spot price of the commodity. This is because it follows the percentage change in the price of the commodity’s front month contract. The problem is the market is in contango. In this situation longer-term contracts are priced higher than near-term contracts and the fund will underperform the underlying commodity. The result is quite impressive and disappointing (for some at least).

I have no idea why the divergence in behavior started in September and why there is such a wide contango in gas. The post proposes two scenarios. One where "UNG will come back in line with the natural gas pricing when (if) there is a the contango spread reduces to historic levels". The second where as the fund is "too big and because futures roll every month, there is no way that this can ever catch up".

Quite interesting example of product "inefficiency".

George Parkanyi writes:

I’ve been trading in Canada a similar ETF called Horizons BetaPro Natural Gas Bull+ ETF (TSX:HNU) – a double-long ETF. That’s also been in an abysmal bear market, having completely imploded after the commodities collapse in the second half of 2008. If you’re buying and holding a double long or short ETF (much worse for the short ones), a long one-way move against pretty-much wipes out the value and you will never recover if you bought at the higher end. However, for an active shorter-term trading strategy, you can still get very good moves out of these. HNU rallied from about $8 to $17 in September and October just recently. That’s a pretty good move if you can catch it. (Although its back down around $9 again now.)

You are right about the contango. As soon as they roll into the front month, it immediately goes down. Keep doing that every month… I have a large gas weighting in my portfolio and that’s my main concern as well.


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