Natural Gas Futures versus Natural Gas ETFs

There is an ongoing debate about the merits of owning "risky and complicated" futures contracts as compared to owning simple and convenient exchange traded funds (ETFs) when you are trying to gain exposure to commodities (or any asset category, for that matter). While I may be the first to trumpet the benefits of stock index ETFs over stock portfolios, I am not so sure about commodity ETFs replacing commodity portfolios.

The poster boy for bad commodity ETFs has been none other than those created for natural gas (NG).  Now, lets be clear, natgas is way down no matter how you look at it.   The glut of NG has contributed to the American miracle of abundant energy supplies and is reflected in NG prices regardless of the source. Given that, what is the difference to an investor in the major natgas ETFs versus actually owning natgas futures contracts?  Let's look at the charts.

The charts below show the monthly returns of the two major natural gas ETFs versus the investible natural gas futures contracts held by VistaCTA.  The top chart shows the return of $1000 invested in the United States Commodity Funds Natural Gas ETF, symbol UNG.  Not to beat up on any fund family, since this ETF was issued there have been a number of controversies that actually, I feel, have little merit and little effect on investor returns.  As anyone can see, both the NG futures and UNG have declined sharply since UNG began trading.

Monthly Returns of A Hypothetical $1000 Investment

As bad as NG futures have been, UNG has been worse.  

Without getting into any technical details, after a few years of trading UNG, the issuer created a new ETF, symbol UNL, designed to be an improvement/alternative to UNG.  Below is the $1000 return of UNL compared to UNG and VistaCTA's NG futures contracts. 

Well, yes, UNL was an improvement, but still worse than NG futures until recent months.

Based on investor returns of the major natgas ETFs versus NG futures, I think one would be hard pressed to justify the comparable losses for an imagined ease or convenience of investment.  I'll compare investing in futures versus an ETF in future posts.