Thursday, October 25, 2012

PSA on the United States Natural Gas Fund, don't event think about buying it.

I was doing my weekly analysis of the natural gas market and I thought I would do a little public service announcement concerning natural gas investing. If you are a gas bull and thinking about playing gas to the upside with exposure to the United States Natural Gas fund (ticker UNG), don't. Cancel your orders and never look back.

The fund invests primarily in future contracts to gain exposure to natural gas, meaning it is subject to the roll or the buying and selling of contracts upon expiration. What this means is that if you own the UNG, you bear all the trading and all other associated costs. If you want to see what this could mean to your investment performance, just look at this tracking error.

The below chart shows how the price of the UNG tracks natural gas since mid-2007, or the inception of the UNG fund.

If you would have invested in the UNG at inception and held to today, you would have lost more than 95% of your investment. This compares to a 66% decline in the price of natural gas, a 30 basis point difference. There are far better ways to play natural gas than the UNG.

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