Caution: Natural Gas ETF Trading at Premium - ETF News And Commentary
January 14 2013 - 8:21AM
Zacks
Natural Gas ETFs have long been a top vehicle for traders as
these products are extremely volatile and can predictably move in
big swings whenever there is a report about storage or production.
Thanks to this, many natural gas ETFs have become quite popular
over the past few years accumulating a big chunk of assets.
While UNG is easily the most popular, investors have also
started to embrace its counterpart, the United States 12
Month Natural Gas Fund (UNL) showing this fund more
interest as well. This fund is arguably better positioned for the
long-term thanks to its more spread out methodology which doesn’t
get as ripped apart by contango as its front-month focused UNG
counterpart (read Natural Gas ETFs Hot as Weather Cools).
Still, if investors are considering this product right now, they
should be aware of a new development in the fund and the ability of
its authorized participants to manage it correctly. Thanks to a
regulatory requirement, United States Commodity Funds was forced to
halt creations in the product until it receives SEC approval.
What Does This Mean?
Basically, Authorized Participants buy and sell baskets of a
particular ETP, helping to keep prices in line with NAVs. When this
is taken away, products often trade at a premium or a discount, and
in the case of UNL, this has made it trade like a closed end fund
with a slight premium, roughly 2% at last look (read 4 Best ETF
Strategies for 2013).
Fortunately, according to IndexUniverse, the issue isn’t
expected to last for more than a couple of days, but it does bring
back some memories of the GAZ debacle.
That ETN from iPath has been trading at a significant premium to
its underlying value for quite some time thanks to a suspension of
new share creations in this product as well. However, this has been
an ongoing issue that has made the product pretty difficult for the
average investor to get a grasp on, as sometimes the premium issue
can drive the price more than the underlying fundamentals of the
natural gas market.
Currently, GAZ is trading at a 14% premium over its NAV, so it
is obviously experiencing a much more potent form of what UNL is
currently seeing (see The Truth about Low Volume ETFs).
So for investors who were considering jumping into natural gas
at this time, be wary of the situation developing in UNL. The
premium isn’t expected to last too long so we could see a quick
drop once creations are allowed once more (see 4 Best New ETFs of
2012).
In the interim, investors have a couple of natural gas ETF
options out there that aren’t having similar issues. These include
the following ETFs:
- United States Natural Gas (UNG) - This is the
most popular of the group and easily the most widely held. However,
long term performance has been quite weak thanks to contango
issues.
- Teucrium Natural Gas ETF (NAGS) - This is
probably the closest thing that investors have to UNL at this time.
The product seeks to spread out exposure across the curve, but it
has a relatively high expense ratio and much wider bid ask spreads
(it is actually trading at a modest discount right now to
NAV).
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IPATH-DJ-A NGAS (GAZ): ETF Research Reports
TEUCRM-NAT GAS (NAGS): ETF Research Reports
US-NATRL GAS FD (UNG): ETF Research Reports
US-12M NATL GAS (UNL): ETF Research Reports
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