On Feb. 26, 2015, the U.S. Energy Information Administration announced that natural gas storage was down to 219 billion cubic feet vs. an expectation of down 241 billion cubic feet. Total working stocks of natural gas were 1.94 trillion cubic feet compared to 1.36 trillion cubic feet for the same period one year ago. This comes down to oversupply. The winter's cold weather helped buoy the price of natural gas due to increased demand, but cold weather doesn’t last forever. Interestingly, none of the above information matters if you’re considering an investment in United States Natural Gas ETF (UNG). Let’s delve a little deeper into this popular ETF. (For more, see: Futures Exchange-Traded Funds.)

UNG Key Metrics

Purpose: Tracks the performance of natural gas by investing in Futures Contracts traded on the NYMEX (near month contract to expire).

Inception Date: April 18, 2007

Total Assets: $626 million

Average Volume: 8.5 million

Expenses: 0.85%

Current Price (as of March 2, 2015): $13.72

52-Week Range: $13.12-$26.88

First, UNG isn’t directly tied to natural gas. Second, UNG has depreciated 96.55% since its inception. Third, the expense ratio of 0.85% is considerably higher than the average exchange-traded fund (ETF) expense ratio of 0.46%. Expense ratios at this level will eat into your profits and accelerate your losses, and it’s a big reason why UNG has depreciated so much since its inception. Even if you’re pro-UNG, one simple fact revealed below might change your mind in a hurry. (For more, see: ETFs Provide Easy Access to Energy Commodities.)

As far as natural gas goes, Benchmark Futures Contract opened at $4.230 MMBtu in January 2014. It peaked at $5.465 MMbtu on Jan. 29, 2014. Since that day, it has been mostly downhill. It finished 2014 at $2.889 MMbtu.

In UNG’s 10-K, it claimed to have seen backwardation (price of near month natural gas Futures Contract higher than price of next month natural gas Futures Contract) in the winter of early spring, but this was followed by contango (price of near month natural gas Futures Contract lower than the price of next month natural gas Futures Contract) for the remainder of the year. (For related reading, see: Got a Commodity ETF? Watch Out for Contango.)

Looking ahead, there is no clear upside catalyst for natural gas. But, once again, when it comes to UNG, it shouldn’t matter. Let's see why.

Better Options

Below is a chart consisting of other investment options that have exposure to natural gas. This chart shows recent and long-term stock performances as of 4/15/15, as well as annual dividend yields.

 

1-Month

YTD

1-Year

3-Year

Dividend Yield

UNG

-8.04%

-14.01%

-49.96%

-5.27%

N/A

APC

15.83%

10.42%

-5.55%

7.41%

1.30%

COP

10.90%

0.04%

-0.38%

10.93%

4.60%

OXY

8.87%

-0.73%

-9.27%

0.71%

3.90%

XLE

8.95%

2.72%

-7.87%

7.68%

2.52%

XOM

3.29%

-5.55%

-8.66%

4.33%

3.30%

In the order listed. Those tickers stand for:

Anadarko Petroleum Corp. (APC)

ConocoPhillips (COP)

Occidental Petroleum Corp. (OXY)

Energy Select Sector SPDR ETF (XLE)

Exxon Mobil Corp. (XOM)

When you look at the chart above, you can see that UNG has underperformed all other stocks (and ETF). To add insult to injury, it’s the only one on that list that doesn’t pay a dividend.

XLE has outperformed UNG for every time frame listed above. This is despite the fact that oil has plummeted recently. XLE came into existence on December 16, 1998. Since then, it has appreciated 236.87%, which is a big difference from UNG over its live trading years. This isn’t to say XLE is resilient to market corrections by any stretch, but thanks to its low 0.15% expense ratio, it’s capable of bouncing back. Also consider the 2.46% yield. Additionally, it’s more liquid: $11.66 billion in net assets. (For more, see: Top Oil ETFs.)

The Bottom Line

Based on the facts provided above, a strong case could be made that there is no point for UNG’s existence, other than to slowly bleed investors of their money. Supporters of UNG will make the case that it’s for trading, not investing. Fair enough, but it has been proven time and time again that active trading in general isn’t as profitable as long-term investing. (For more on natural gas ETFs, see: Examining the Proshares UltraShort Natural Gas ETF (KOLD) and Direxion Natural Gas Leverage 3x ETF (GASL) and UGAZ 3X Long Natural Gas ETN Velocityshares.)

Dan Moskowitz does not have any positions in any of the ETFs or stocks mentioned in this article.

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