United States Natural Gas Fund (UNG)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 07, 2023

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What Is the United States Natural Gas Fund (UNG)?

The United States Natural Gas Fund is an exchange-traded fund (ETF) that tracks the price movements of natural gas. The fund aims to expose investors to the daily changes in the price of natural gas futures contracts.

This allows investors to participate in the natural gas market without needing a futures account.

UNG is managed by United States Commodity Funds LLC (USCF), a commodity pool operator registered with the Commodity Futures Trading Commission (CFTC).

USCF employs a team of professionals with extensive experience in managing commodity-focused investment products.

Investing in UNG offers several benefits, including exposure to natural gas price movements, the convenience of an ETF structure, and the potential for portfolio diversification.

Unlike investing directly in natural gas futures, UNG does not require a futures trading account, making it accessible to a broader range of investors.

UNG Structure and Trading Mechanics

Basics

As an ETF, UNG trades on a stock exchange like individual stocks. It allows investors to buy and sell shares during normal trading hours. The fund's net asset value (NAV) is calculated at the end of each trading day based on the closing prices of its futures contracts.

Trading Process

Investors can trade UNG shares through any brokerage account. The shares are bought and sold at market prices, which can differ from the fund's NAV.

The fund issues and redeems shares in large blocks known as "creation units" to and from authorized participants, usually large financial institutions.

Pricing and Valuation

The price of UNG shares is determined by supply and demand dynamics in the market. However, it's closely tied to the value of its underlying assets – natural gas futures contracts. The fund's NAV represents its total assets minus liabilities per share value.

UNG Structure and Trading Mechanics

UNG's Investment in Natural Gas Futures Contracts

Concept of Futures Contracts

Futures contracts are agreements to buy or sell a specific amount of a commodity, in this case, natural gas, at a predetermined price on a set date in the future.

Producers and consumers of the commodity use them to hedge against price changes and by speculators for potential profit.

Role in the Fund's Portfolio

UNG primarily invests in near-month natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX). The fund's performance aims to reflect the changes in the price of these contracts.

Risks and Benefits

While investing in futures contracts offers the potential for significant returns if natural gas prices rise, it also carries high risks. The prices of futures contracts can be highly volatile, and investors can lose a substantial amount if prices move against their position.

Performance History of UNG

Key Performance Indicators

The key performance indicators for UNG include its total return, the performance of its underlying index, and the changes in the price of natural gas futures contracts.

Historical Returns

Since its inception, UNG's performance has varied widely due to the volatility of natural gas prices. Investors should review the fund's historical returns when considering an investment in UNG.

Benchmark Comparison

UNG's performance is often compared to the Bloomberg Natural Gas Subindex, a benchmark that reflects the potential return of natural gas futures contracts. This comparison can provide insight into the fund's relative performance.

Role of UNG in Portfolio Diversification

Commodities as an Asset Class

Commodities, including natural gas, are considered a distinct asset class that can provide diversification benefits. They have unique performance characteristics and can offer a hedge against inflation.

Correlation With Other Asset Classes

As represented by UNG, natural gas often exhibits a low correlation with traditional asset classes such as stocks and bonds. This means that natural gas can perform well when other investments are struggling, providing potential portfolio diversification benefits.

Impact on Portfolio Risk and Return

An investor can improve the portfolio's risk-return trade-off by adding UNG to a portfolio. However, given the volatility of natural gas prices, UNG should be used as part of a balanced and diversified portfolio.

Role of UNG in Portfolio Diversification

Risks Associated With Investing in UNG

Market Risk

UNG is exposed to the risk that the price of natural gas will fall. This could be due to factors such as changes in supply and demand, weather conditions, and geopolitical events.

Liquidity Risk

There is also a risk that UNG shares could become difficult to trade. This could happen if the market for the shares becomes illiquid or if the underlying futures contracts are disrupted.

Regulatory Risk

UNG operates under various regulatory frameworks, including those of the U.S. Securities and Exchange Commission (SEC) and the CFTC. Changes in these regulations could impact the fund's operations and performance.

UNG and the Natural Gas Market

Influence of Supply and Demand

The price of natural gas, and therefore the performance of UNG, is heavily influenced by supply and demand dynamics.

Factors such as the level of natural gas production, the availability of storage capacity, and the demand for natural gas for heating and electricity generation can all impact prices.

Impact of Weather Conditions

Weather conditions can significantly impact the demand for natural gas, particularly in the U.S. Winters that are colder than average can increase the demand for natural gas for heating.

In contrast, hotter-than-average summers can increase the demand for natural gas for electricity generation.

Geopolitical Factors

Geopolitical events can also affect the natural gas market. For example, conflicts or political instability in regions that are major natural gas producers can disrupt supply and cause prices to fluctuate.

Regulatory Framework for UNG

US Securities and Exchange Commission (SEC) Oversight

As an ETF, UNG is subject to the regulations of the SEC. This includes rules related to the disclosure of information, the management of the fund, and the trading of the fund's shares.

Commodity Futures Trading Commission (CFTC) Regulations

As a fund that invests in futures contracts, UNG is also subject to the regulations of the CFTC. These regulations cover areas such as trading futures contracts, managing the fund's assets, and reporting requirements.

Other Relevant Laws and Regulations

UNG must also comply with other laws and regulations, including those related to anti-money laundering and tax. Compliance with these rules is critical for the fund's continued operation.

Conclusion

UNG is an ETF that provides exposure to natural gas prices through investment in futures contracts.

It offers potential benefits such as portfolio diversification and the possibility of high returns. However, it also carries significant risks, including market, liquidity, and regulatory risks.

It allows investors to gain exposure to the natural gas market without the need to trade futures contracts directly.

The fund's performance is closely tied to the price of natural gas, making it a potentially profitable investment when natural gas prices rise. However, it also carries risks, including the volatility of natural gas prices and potential regulatory changes.

Investing in commodities like natural gas can be a part of a balanced investment strategy. If you're considering adding UNG to your portfolio, it's essential to understand your risk tolerance and investment objectives.

A professional wealth manager can provide personalized advice based on your individual circumstances.

United States Natural Gas Fund (UNG) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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