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ETFs Natural Gas: An Explosive Combination?

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Futures Or Stocks When It Comes To ETFs Natural Gas?

etfs natural gasMaybe you’ve heard that over the past few years ETFs natural gas prices have done a whole lot of nothing compared to oil prices, but that situation begs the question: What’s the deal with ETFs offering exposure to natural gas? As is the case with most commodities, the exchange-traded products universe offers investors ways of accessing natural gas futures or ETFs that hold the stocks of natural gas exploration and production companies.

And despite tumbling natural gas prices, the outlook for ETFs natural gas is actually a win-win proposition. First, ETFs that are levered to natural gas are worth considering because emerging markets such as China and India are massive polluters and those countries are eagerly looking for ways to reduce their pollution footprints by increasing use of cleaner burning fuels. Enter natural gas.

Second, ETFs natural gas are getting a lift from the North American shale boom. This is where producers use the sometimes controversial technique known as “fracking” to separate gas and oil from centuries-old rock formations. The U.S. has an abundance of shale gas and the shale boom is still in the early innings, meaning good things await ETFs natural gas.

ETFs Natual Gas: The Fund To Avoid

Unless you’re an active trade, steer clear of the U.S. Natural Gas Fund (NYSE: UNG), which is easily the most controversial and perhaps the worst of the lot when it comes to ETFs natural gas. UNG holds natural gas futures, but since the fund is heavily weighted to the front-month contract, it has to roll contracts every month.

That many not sound like much, but the expenses associated with rolling those contracts add up. In fact, those expenses mean an ETF natural gas like UNG can actually lose investors money while natural gas prices are rising. Talk about a bitter pill to swallow.

ETFs Natural Gas: Equity ETFs To Consider

One of the top ETFs natural gas investors should have a look at is the First Trust ISE-Revere Natural Gas Index Fund (NYSE: FCG). FCG is home to 30 stocks with a good mix of independent natural gas producers and major oil companies. FCG’s lineup includes companies such as Anadarko Petroleum (NYSE: APC), EOG Resources (NYSE: EOG), Range Resources (NYSE: RRC), Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A).

If you’re looking for an ETF natural gas with even more stocks and more oil exposure, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is an excellent bet. XOP holds all of the stocks we just mentioned, plus dozens more with an expense ratio that is far superior to FCG’s. Be advised: XOP is one of the most volatile ETFs on the market, ETFs natural gas or otherwise. It makes for a great short-term trade, but XOP may not be suitable for long-term investors.

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