(By Jared Cummans) At this point, there isn't anything new to say about natural gas. Its massive decline has been well documented and it seems that most of the investing world has temporarily lost hope that NG will recover anytime soon. While it is true that recent losses have been attributed to an unseasonably warm winter as well as growing supply, natural gas has been on a slippery slope since the recession began. But despite its losses, it is also widely agreed that this commodity will play an increasing role in out world's future energy supply, as the fossil fuel is being utilized in a number of new mediums [see also 25 Ways To Invest In Natural Gas].
This leaves investors in a pickle; adding NG exposure seems like a sound idea for the long term, but picking the right investment seems impossible. Many have turned to ETFs to gain exposure to their favorite commodities, as these products make investing simpler and take away a lot of the risks involved with futures investing. By far, the most popular ETF for natural gas comes from the United States Natural Gas Fund LP (NYSEARCA:UNG). But UNG has burned thousands of investors over the years, prompting many to beg for an alternative solution. Below, we compare UNG to a competing ETN that offers a much better play on this sputtering commodity [see also Why You Should Invest In Natural Gas: The Fuel of the Future].
United States Natural Gas Fund LP (NYSEARCA:UNG)
UNG is an ETF that invests in front-month NG futures, a dangerous allocation. Utilizing a front-month strategy in an ETF means that UNG has an automated roll process that sells the current contract and buys into the next nearest one at some point every month. Natural gas is well-known to exhibit massive contango, a phenomenon by which near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. When UNG completes its automated roll, it typically sells the current contract and buys into the more expensive, next month, contract (this of course assumes a contangoed environment, a safe assumption with NG). This instantly erases value for the fund and its investors.