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WHAT IS 'Natural Gas ETF'

A natural gas ETF, or natural gas exchange-traded fund, is an exchange-traded fund that invests in natural gas futures or other products in an effort to closely track the price of delivered natural gas at market. Natural gas ETFs are set up as commodity pools, which issue limited partnership interests as opposed to shares. The fund may also invest in heating oil, crude oil and gasoline futures.

BREAKING DOWN 'Natural Gas ETF'

Natural gas ETFs are commodity ETFs that typically track a commodity index made up of futures, or asset-backed contracts. In most cases, an investor in a natural gas ETF owns a set of contracts that are backed by the commodity, rather than owning the physical asset. This type of ETF is different from a non-commodity ETF, which is often comprised of multiple securities that share a similar investment profile.

The United States Natural Gas Fund, which is issued by the U.S. Commodity Fund and trades as UNG, is an example of a widely traded natural gas ETF. This fund is made up of natural gas futures contracts and swaps, and uses the New York Mercantile Exchange, known as NYMEX, as its natural gas futures contracts benchmark. The NYMEX is tied to the Henry Hub spot price. The United States Natural Gas Fund is very sensitive to fluctuations in natural gas prices, so investors have to watch market prices closely to yield a profit.  

Natural gas ETFs opened well when they first began trading on the American Stock Exchange, or AMEX. Having a more liquid way to access natural gas as both a speculative and hedging play is very useful to both retail and institutional investors. Investors should expect small tracking errors over shorter time frames, but see strong correlation to the spot price of natural gas over medium and longer time horizons.

Top Natural Gas ETFs

For investors interested in natural gas ETFs, there are many funds to choose from. Some of the top natural gas ETFs by assets in 2018 included:

  • United States Natural Gas Fund, which trades as UNG
  • VelocityShares 3x Long Natural Gas, which trades as UGAZ
  • VelocityShares 3x Inverse Natural Gas, which trades as DGAZ
  • ProShares Ultra Bloomberg Natural Gas, which trades as BOIL
  • United States 12 Month Natural Gas Fund, which trades as UNL
  • ProShares UltraShort Bloomberg Natural Gas, which trades as KOLD
  • iPath Series B Bloomberg Natural Gas Subindex Total Return ETN, which trades as GAZB
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