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Why Long Term Natural Gas Investing Could Be Profitable


Why Natural Gas Investing Looks Good Long Term

Natural Gas InvestingDue to the prolonged slump in natural gas prices that started in 2010, natural gas investing has fallen off the radars for many investors.  The explosion of hydraulic fracturing drilling, commonly known as “fracking”, and a sluggish United States economy have caused natural gas supplies to overwhelm natural gas demand, which has sent natural gas prices tumbling.  The only investors making money in natural gas investing since fracking dramatically increased natural gas supplies have been those who have invested in natural gas from the short side, expecting it to fall in price.

Fracking for natural gas is showing no signs of slowing down; however, the low price for natural gas is causing an increase on the demand side of the natural gas price equation. This presents a compelling long term natural gas investing opportunity from the long side, as increased demand could cause natural gas to rise in price over the long term.  Increasing demand for natural gas is primarily coming from:  power plants that are converting from burning coal to burning natural gas to produce electricity, businesses and homeowners that are converting to natural gas for heat during the winter, trucking companies that are converting their truck fleets to run on natural gas, and energy-intensive industries that have turned to natural gas due to its low price.  The first liquefied natural gas exporting facility in decades is slated to open in the state of Louisiana during 2015 to ship domestically produced natural gas to natural gas consumers overseas, which will increase demand for natural gas produced in the United States.

Natural Gas Investing –Ways To Invest In Natural Gas

Natural gas investing for the long term should be done via direct investments in companies in the natural gas industry, or via either mutual funds that invest in companies in the natural gas exploration, production, and services industries.  Due to the tendency for natural gas futures contracts to suffer from futures contracts price decay, investing in natural gas Exchange Traded Funds (ETFs) can turn out to be a losing investment, even if the price of natural gas increases in the long run, and is not recommended by financial advisors.

Natural gas producers, such as Apache (APA), Devon Energy (DVN), and Chesapeake Energy (CHK), among others, are avenues for natural gas investing.  Natural gas utility stocks are also avenues for natural gas investing, and may be the preferable natural gas investing route for conservative investors looking for stability and dividend payouts.

Mutual funds that invest in the natural gas industry, such as Fidelity Select Natural Gas (FSNGX), FBR Gas Utility Index (GASFX), and First Trust ISE-Revere Natural Gas Index ETF (FCG) can be utilized for investing in natural gas.  The advantage of using mutual funds to invest in natural gas is that they spread investment risk over a number of different companies in the natural gas industry.

Increasing use of natural gas domestically and the importation of natural gas to other countries should cause natural gas demand for natural gas produced in the United States to rise over the coming decade, which makes long term natural gas investing a compelling long term investment.

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Investing In Natural Gas


Investing In Natural Gas Is Easy

Investing In Natural GasInvesting in natural gas can be done on  both the long and the short side via a number of investment vehicles, including stocks, Exchange Traded Funds (ETFs), and mutual funds.  Traders typically play the natural gas market by buying natural gas futures (see Buying and Selling Futures).  For traders who do not wish to get involved in the natural gas futures market, ETFs that invest in natural gas futures can be used to trade natural gas.

Investing In Natural Gas Can Be Done In Many Ways

The following is a list of the most popular ETFs for trading natural gas futures on both the long and short side.  It should be noted that ETFs are more suitable for trading natural gas rather than investing in natural gas.  This is due to price decay that occurs as the natural gas futures contracts that the ETFs hold expire and the next month’s natural gas futures contracts must be purchased, often at a higher price than the expiring contracts, which decreases the value of the ETFs over time.

  • United States Natural Gas (UNG) – An ETF that is designed to replicate the performance, after expenses, of natural gas.  UNG invests in near month natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX), which are the futures contracts that are closest to expiration.
  • Horizons BetaPro NYMEX Natural Gas Bull (HNUZF.PK and HNU.TO) A two times leveraged long ETF that trades in the United States
    on the Pink Sheets and in Canada on the Toronto Stock Exchange (TSE).  Through the use of financial instruments, HNUZF.PK / HNU.TO replicates two times the near month natural gas futures contracts traded on the NYMEX, after expenses.
  • Horizons BetaPro NYMEX Natural Gas Bear (HBNNF.PK and HND.TO) A two times leveraged short ETF that trades in the United States
    on the Pink Sheets and in Canada on the TSE.  Through the use of financial instruments, HBNNF.PK / HND.TO replicates the inverse of two times the near month natural gas futures contracts traded on the NYMEX, after expenses.

To avoid the problem of price decay that often occurs as ETFs roll over their natural gas futures contracts to future months, investing in natural gas for the long term should be done by buying the stocks of companies that produce, transport, and sell natural gas or mutual funds that invest in companies in the natural gas industry.  For investors, investing in natural gas by buying stocks or mutual funds related to the natural gas industry has the added benefit that many of these stocks and mutual funds pay dividends, which increase investment returns over long periods of time.

The stocks of natural gas producers such as Apache (APA), Devon Energy (DVN), and Chesapeake Energy (CHK), among many others, are a way to invest in natural gas.  Natural gas utility stocks should also be considered by investors looking at investing in natural gas, due to their stability and tendency to pay reliable dividends.

The following is a sample of natural gas mutual funds that can be utilized for investing in natural gas:

  • Fidelity Select Natural Gas (FSNGX) A no-load natural gas mutual fund that invests in natural gas producers, processors, transporters, and distributors.
  • FBR Gas Utility Index (GASFX) A no-load natural gas mutual fund that focuses on dividend paying natural gas transportation and distribution companies, including utilities.  The dividends paid by companies held by the
    fund are distributed to fund’s shareholders.
  • First Trust ISE-Revere Natural Gas Index ETF (FCG) A natural gas ETF that invests in natural gas exploration, production, and service companies. The ETF tracks the International Securities Exchange (ISE)-Revere Natural Gas Index.

Investing in natural gas is not the same as trading natural gas.  Natural gas offers some excellent trading opportunities via the natural gas futures market.  However, investing in natural gas should be done by buying financial instruments directly related to the natural gas industry, so that investment capital is not eroded by price decay in the futures market and dividends from the natural gas industry are accrued over time.
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