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Natural Gas ETFs Jump on Colder-Than-Normal Weather Forecast

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Natural gas prices have been spiking lately on projections for cooler-than-expected temperatures in the second half of January.

Per CNBC, updated reports showed that weather conditions will cool down significantly with below-average temperatures over the next two weeks and the cold snap drifting eastward from the Midwest toward the East Coast. According to Bespoke Weather Service, weather model changes over the weekend were "incredibly bullish" as intense cold is expected this weekend.

A prolonged cold weather will continue to spur heating demand in homes and business, and put pressure on inventories, bolstering natural gas prices. Investors should note that November-March is generally the peak demand period for gas consumption in the United States (read: Best & Worst Zones of 2018 and Their ETFs).

With natural gas inventories still 15% below the five-year average, investment bank Barclays sees room for higher prices even if weather normalizes during the rest of winter. Given the bullish fundamentals, natural gas price is rising and is poised to spike even further. 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 $324.5 million and trades in volume of around 4.2 million shares per day. The fund has 1.30% in expense ratio and surged 13.4% in a week.

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 $4.9 million in its asset base and charges 90 bps in annual fees. The product trades in paltry average daily volume of 9,000 shares and has gained 5.3% in a week (read: Best Commodity ETFs of 2018 to Watch Again in 2019).

iPath Bloomberg Natural Gas Subindex Total Return ETN (GAZ - Free Report)

The note delivers returns through an unleveraged investment in the natural gas futures contract plus the rate of interest on specified T-Bills. It follows the Bloomberg Natural Gas Subindex Total Return Index. The product is unpopular and illiquid with AUM of $4.4 million and average daily volume of 1,000 shares. Expense ratio comes in at 0.45%. GAZ is up 10.6% in a week.

Leveraged Plays

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. ProShares Ultra Bloomberg Natural Gas (BOIL - Free Report) and VelocityShares 3x Long Natural Gas ETN (UGAZ - Free Report) soared 43.2% and 25.3%, respectively, in a week. BOIL offers two times (2x) the daily performance of the Bloomberg Natural Gas Subindex while UGAZ provides three times long exposure to the performance of the S&P GSCI Natural Gas Index. BOIL costs less in annual fees, charging 95 bps compared to 1.65% for UGAZ (read: Inverse Leveraged ETFs Swell With Assets: Alarm Bells Ringing?).

Bottom Line

If the cold weather continues, demand for fuel for heating 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 cooler in the weeks ahead.

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