Key Takeaways
- Tracks daily price changes of natural gas futures.
- Uses rolling futures contracts to avoid delivery.
- Subject to NAV decay from contango roll costs.
- Launched in 2007 with a 0.60% management fee.
What is United States Natural Gas Fund (UNG)?
The United States Natural Gas Fund (UNG) is an exchange-traded fund (ETF) designed to track the daily percentage price changes of natural gas futures contracts based on the Henry Hub benchmark. It offers investors a way to gain exposure to natural gas price movements without directly trading futures.
UNG primarily invests in near-month NYMEX natural gas futures contracts, aiming to reflect short-term price fluctuations rather than long-term spot prices. It is a popular instrument for those interested in commodity ETFs, distinct from equity or bond funds.
Key Characteristics
UNG has several defining features that make it unique among energy ETFs:
- Benchmark Focus: Tracks the front-month NYMEX natural gas futures contract, rolling to the next contract near expiration to avoid physical delivery.
- Collateralization: Fully backed by cash, cash equivalents, and short-term U.S. government obligations to secure futures positions.
- Management Fees: Charges 0.60% on the first $1 billion in assets, decreasing to 0.50% above that threshold.
- Volatility Exposure: Reflects natural gas price volatility, which can be significant, making it a high-risk, high-reward vehicle.
- Trading Venue: Listed on NYSE Arca, allowing easy access through most brokerage accounts.
How It Works
UNG achieves its goal by investing in near-month natural gas futures contracts traded on the NYMEX, continually rolling positions to the next month before expiration. This roll mechanism helps avoid physical delivery but can cause performance drag due to contango, where future prices exceed spot prices.
The fund’s net asset value (NAV) reflects the value of its futures contracts minus expenses and liabilities, with share prices trading on the exchange potentially deviating slightly from NAV due to market supply and demand. Investors can buy or redeem large blocks of shares through authorized participants, helping keep the ETF's price aligned with its underlying assets.
Examples and Use Cases
UNG is widely used by investors and companies to gain natural gas exposure without direct futures trading:
- Energy Sector Investors: Those interested in energy stocks may use UNG to complement their portfolio with pure commodity exposure.
- Hedging: Companies like Delta and American Airlines might hedge fuel costs indirectly by monitoring natural gas price trends reflected through instruments like UNG.
- Speculation: Traders seeking short-term exposure to natural gas price rallies or declines can take positions in UNG, benefiting from its alignment with the underlying futures market.
- ETF Diversification: UNG can be part of a diversified portfolio that includes other ETFs, such as those listed in the best ETFs guides, to balance risks and returns.
Important Considerations
While UNG offers convenient exposure to natural gas prices, it carries specific risks investors should understand. Its performance can diverge from spot natural gas due to roll costs in contango markets, leading to potential NAV decay over time. This makes it less suited for long-term holding and more appropriate for tactical or short-term strategies.
Additionally, the fund’s volatility is often higher than traditional equities, so managing risk through diversification or position sizing is essential. For investors unfamiliar with commodity ETFs, reviewing terms like OandNE and market dynamics can provide valuable context before investing.
Final Words
UNG offers a way to gain exposure to natural gas price movements but is best suited for short-term trading due to potential roll costs and NAV decay. Consider comparing UNG with other natural gas investment options before committing to ensure it aligns with your strategy.
Frequently Asked Questions
UNG is an exchange-traded fund (ETF) that tracks the daily price changes of natural gas futures delivered at Henry Hub, Louisiana. It aims to mirror the daily percentage change in natural gas prices as measured by its benchmark futures contract on the NYMEX.
UNG primarily invests in near-month natural gas futures contracts traded on the NYMEX, along with smaller allocations to related futures, forwards, or swaps. These positions are fully collateralized by cash and U.S. government obligations to manage risk and liquidity.
UNG avoids physical delivery by rolling its futures contracts about two weeks before expiration, selling the near-month contract and buying the next-month one. This can lead to roll costs during contango, where future prices are higher than spot prices, potentially causing NAV erosion over time.
UNG charges a management fee of 0.60% of net asset value on the first $1 billion in assets, which decreases to 0.50% on assets above that amount. Trading commissions are not included in this fee.
UNG aims to track the daily percentage change of natural gas futures prices closely, but performance can diverge over longer periods due to roll costs, volatility, and tracking errors. The fund is designed for short-term exposure rather than long-term spot price performance.
Investing in UNG involves risks related to futures market volatility, roll costs during contango, and potential NAV decay. Unlike equity ETFs, UNG’s performance can be affected by commodity-specific factors and the mechanics of futures contracts.
UNG was launched on April 18, 2007, and is managed by United States Commodity Funds LLC.
Authorized participants create or redeem large blocks of UNG shares—typically 50,000 shares—in exchange for underlying futures contracts. This process helps keep the ETF’s market price aligned with its net asset value.
