Energy has been a volatile sector over the past few years. As of mid-January, 2020, the S&P Goldman Sachs Commodity Index (SPGSCI)—which tracks 24 exchange-traded futures contracts that cover physical commodities over five sectors, with a weighting in energy—is posting a 6.66% one-year return. But the S&P 500 Energy (stocks included in the S&P 500 that are classified as members of the energy sector) is reporting a loss of 0.88% in terms of one-year returns.

Natural gas prices provide one segment of the market for speculation. Despite challenges in the energy market overall, America’s energy companies continue to do a great job producing natural gas far more cheaply than they have in the past, finding ways to make a profit even under today’s depressed oil and gas prices. While oil prices have only slightly gained from market lows, the outlook for energy is slowly improving with many commodity prices gaining across the market.

Therefore, adding exposure to natural gas may make sense as part of a well-diversified investment strategy. For investors, there are several natural gas exchange-traded funds (ETFs) that can be used for staking a position in the commodity. Out of the seven that exist, here’s a look at the three of the most actively traded for potential investment in 2020.

Figures are current as Jan. 14, 2020.

key takeaways

  • One way to play the volatile energy sector is via natural gas ETFs.
  • Three of the most actively traded natural gas funds are VelocityShares 3x Long Natural Gas ETN, United States Natural Gas Fund, and, for a contrarian play, VelocityShares 3x Inverse Natural Gas ETN.

VelocityShares 3x Long Natural Gas ETN (UGAZ)

Issuer: Credit Suisse

Assets under Management: $886.71 million

Average Daily Volume: 3.1 million

1-Year Daily Total Return: -83.73%

Expense Ratio: 1.65%

As the name suggests, this is a 3x leveraged exchange-traded note (ETN). That is, it seeks to replicate, net of expenses, three times the performance of the S&P GSCI Natural Gas Excess Return Index, which tracks gains or losses from changes in futures contract prices and returns from rolling the contracts.

Note, this ETN is intended for short-term investing—even day trading—as a vehicle for exposure to the global natural gas market. Three-year daily total returns were -71.79%.

United States Natural Gas Fund, LP (UNG)

Issuer: U.S. Commodity Fund

Assets under Management: $437.8 million

Average Daily Volume: 4.348 million

1-Year Daily Total Return: -34.33%

Expense Ratio: 1.28%

UNG holds natural gas futures contracts and swaps, making it highly sensitive to movement in natural gas prices. Its benchmark is natural gas futures contracts on the NYMEX, which is tied to the Henry Hub spot price.

Founded in 2007, this fund isn’t really a “buy and hold” pick—investors must be willing to track fluctuations in market price in order to turn a profit on futures. Its expense ratio is also fairly steep, dragging down overall returns. However, this ETF does give you clean access to the dominant player in the natural gas futures market.

The fund's annualized returns reflect the overall volatility of energy prices. One-year, three-year and five-year annualized returns are -33.03%, -18.82%, and -22.60%, respectively.

VelocityShares 3x Inverse Natural Gas ETN (DGAZ)

Issuer: Credit Suisse

Assets under Management: $155.43 million

Average Daily Volume: 1.217 million

1-Year Daily Total Return: 76.05%

Expense Ratio: 1.65%

This ETN takes the inverse position and is opposite the VelocityShares 3x Long Natural Gas ETN. It is a tactical vehicle intended for intraday trades as opposed to long-term investing. As an inverse leveraged fund, DGAZ provides -3x exposure to the S&P GSCI Natural Gas Index for a one-day period, which means that holding the note for more than a day may result in returns that vary greatly from the -3x long-term position due to compounding.

The fund’s inception date is February 7, 2012. It has a one-year annual total return of 45.98%. Its three-year return is -15.47%.