Commodity investing has remained choppy, pretty much across the board. Thanks to the political gridlock, many commodity ETFs have of late been pushed into the red as demand for risky assets has been uncertain.
Meanwhile, in the natural gas market, prices have been severely under pressure, not just for this month, but for the longer term as well. This is largely due to a burst of supply, thanks to fresh technologies that bring out more of this precious commodity.
The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed the domestic energy supply, with a potentially inexpensive and abundant new source of fuel for one of the world’s largest energy consumers (Read: The Comprehensive Guide to Natural Gas ETFs).
With the U.S. projected to surpass Russia in the global energy race this year, the Oil & Gas sector in the U.S. has been in focus. According to the Energy Information Administration (EIA), the U.S. is projected to produce almost 50 quadrillion British thermal units of oil and natural gas in 2013, which is almost 10% above the second-largest producer, Russia, and double the third-largest producer, Saudi Arabia.
The short-term projections look favorable for the natural gas sector due to a few rig shutdowns in the Gulf of Mexico in the wake of tropical storms, which raised natural gas prices. Warmer weather expected for the month of October also acted as a catalyst.
Though this trend might be short-lived in the natural gas market, more hot (or cold) weather could definitely extend this rally for a bit longer (Read: Natural Gas ETFs Jump on Hopes of Warm Weather).
However, many investors generally focus in on one ETF for their exposure to this space, United States Natural Gas ETF ((UNG - ETF report). This product attracts a great deal of assets, and remains quite popular, despite a potentially better long term option existing, First Trust ISE Revere Natural Gas Fund ((FCG - ETF report).
Below we have given a comparative analysis of these two ETFs from the Natural Gas segment, each taking different sides on the performance front due to the difference in approach. Hopefully, by taking a look at some of these factors, investors can better ascertain which natural gas ETF is right for them:
Fund Objective and Index Exposure
Launched in May 2007, (FCG - ETF report) tracks the ISE-Revere Natural Gas Index, which is an equal-weighted index comprising exchange-listed companies that derive a substantial portion of their revenues from the exploration and production of natural gas.
The fund will normally invest at least 90% of its net assets plus the amount of any borrowings for investment purposes in common stocks comprising the index. Since inception, the product has amassed $495.9 million in assets.
Launched in April 2007, United States Natural Gas ETF ((UNG - ETF report) tracks the Henry Hub Natural Gas Price Index, which is also an equal-weighted index. The product seeks to replicate the performance, net of expenses, of natural gas. The trust invests in futures contracts on natural gas traded on the NYMEX that is the front month contract to expire. Compared to FCG, the ETF is rich in AUM with an asset base of $894.8 million.
A Difference in Asset Class
FCG takes an equity based approach by including stocks that are engaged in the production and exploration of oil and natural gas in its portfolio. Therefore, it is implied that the fund would not be impacted by the technicalities and complications of the derivatives market, like its competitor UNG (Read: The Key Differences between Natural Gas ETFs).
UNG is a futures ETF which tries to capture the daily difference in spot prices of natural gas by gaining exposure to future contracts. Although futures can be considered an efficient, cost effective way to gain exposure in the commodities market without having to deal with storage costs and physical delivery, they still have their own risks.
While UNG deals in future gas contracts, FCG holds a total of 26 U.S. based securities in its basket. Its top 10 holdings make about 42% share in the basket.
Trading Size & Fees
UNG has a huge average daily trading volume of 4.95 million shares a day, while FCG has an average daily trading volume of 641,400 shares a day
For exposure in futures contract, UNG charges a hefty fee of 99bps, while FCG is a relatively cheaper choice as it charges investors 60bps in fees (Find all Energy ETFs).
What makes FCG attractive?
FCG employs an innovative methodology to select stocks from the entire universe of companies engaged in the energy exploration & production business. The stocks are screened and ranked based on certain fundamental factors such as price to earnings, price to book value, market capitalization and return on equity.
The ranks are then averaged and the top 30 stocks become part of the index and are weighted equally. However, it is prudent to note that these stocks may not have a 1:1 correlation with the natural gas futures price; therefore it may not be a pure play on the commodity. Furthermore, the index eliminates those gas companies whose reserves do not meet certain criteria.
UNG has posted a negative performance of about 1.3% year-to-date, in stark contrast to FCG. Despite facing some headwinds in its path, FCG has given sturdy returns of about 23% so far this year. (Read: Natural Gas ETFs Continue to Soar).
In terms of the last 52-week price performance FCG clearly stands as the winner, since the product has gained almost 11%, whereas UNG has shed close to 14.5%.
FCG is less volatile to UNG when compared with the S&P 500 index. Moreover FCG has a better Beta and R-squared score than UNG.
The 50-Day Simple Moving Average for UNG has appreciated by only 1.09%, while for FCG it has appreciated by 7.32%.
Given the strong performance, investors are more likely to switch from investing in futures gas ETF UNG to the equity ETF FCG. The fund has also performed quite well against others in the same sector, and its lack of futures curve issues could make it a better pick over the long term.
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