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Natural Gas ETFs Surge on Hot Weather Outlook

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Natural gas price surged this week on hot weather forecast and this summer trend is likely to continue. Warmer-than-normal temperatures are expected in most of the Midwest and east coast over the next two weeks, and this should propel natural gas demand for air conditioning.

An intense hot weather will spur cooling demand in homes and business, and ease pressure on storage injection levels, bolstering natural gas prices. Industrial energy demand is also showing signs of increasing as global economies are emerging from coronavirus-imposed lockdowns. Per the latest data from the Energy International Agency, demand rose across all domestic sectors last week, with power generation reaching a summer high.

Additionally, an increase in liquefied natural gas export demand added to the strength. Per Reuters, U.S. liquefied natural gas exports are set to rise in August for the first time in six months.

Investors should note that the natural gas price had plunged to a 31-year low in June on falling demand due to the pandemic (read: Time to Cash in On the Depressed Oil Price? ETFs in Focus).

Given the bullish fundamentals, investors should tap this trend with lower risk using the ETFs. These ETFs might be easier plays for investors seeking to deal directly in the futures market:

United States Natural Gas Fund (UNG - Free Report)

The fund provides direct exposure to the price of natural gas on a daily basis through futures contracts. If the near month contract is within two weeks of expiration, the benchmark will be the next month contract to expire. It has AUM of $410.5 million and trades in volume of around 5.5 million shares per day. The fund has 1.28% in expense ratio and has surged 21.1% so far this week (see: all the Energy ETFs here).

United States 12 Month Natural Gas Fund (UNL - Free Report)

This product seeks to offer spread-out exposure across the futures curve in order to mitigate contango, a huge problem in the natural gas ETF market. The investment objective of UNL is to reflect the daily changes in the price of natural gas delivered at the Henry Hub Louisiana. Its benchmark is the near month futures contract to expire and the contracts for the following 11 months, for a total of 12 consecutive months. If the near month futures contract is within two weeks of expiration, the benchmark will be the next month contract to expire and the contracts for the following 11 consecutive months. UNL has accumulated $6.1 million in its asset base and charges 90 bps in annual fees. The product trades in paltry average daily volume of 27,000 shares and has gained 5.7% over the past couple of days this week.

iPath Bloomberg Natural Gas Subindex Total Return ETN

The note provides exposure to the Bloomberg Natural Gas Subindex Total Return, which consists of the contract in the Bloomberg Commodity Index Total Return that relates to natural gas. The product is unpopular and illiquid with AUM of $3.4 million and average daily volume of 6,000 shares. Expense ratio comes in at 0.75%. GAZ has added 5.7% in the past couple of days.

ProShares Ultra Bloomberg Natural Gas (BOIL - Free Report)

For investors seeking to play on the natural gas spike for outsized profits in a short span, a leveraged bet might be a way to go. BOIL offers two times (2X) the daily performance of the Bloomberg Natural Gas Subindex. It charges 95 bps in annual fees and has amassed $120.4 million in its asset base. The ETF has jumped 43.4% so far this week (read: 6 Leveraged ETFs That Gained More Than 25% in July).

Bottom Line

If the hot weather continues, demand for fuel for cooling purposes will likely grow and could lower the huge stockpiles of natural gas, pushing the price upward. As a result, investors could definitely tap the surge in natural gas price with the above-mentioned ETFs provided the weather is hotter in the weeks ahead.

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