A Case for Natural Gas
1. The key to identifying the next profitable sector is often to look for what’s been beat up and “under the radar”. Natural gas has been out of favor and on the down slope for a couple of years now.
2. Found at Financial Sense University (click chart to enlarge)
Commitment of Traders has been steadily rising for natural gas, and they say it’s wise to follow the “big boys” aka “the smart money”.
So I’ve placed a bet on this dark horse, and purchased a few shares of UNG (UNITED STATES NATURAL GAS FUND, LP). More details on this “kind of ETF”
In addition, we’re still holding Vault Energy Trust units. Vault Energy derives 69% of its revenue from natural gas. It’s expected that VNG.UN will cut the distribution on the upcoming meeting on August 15, so the unit price has been falling recently. I don’t think this is the bottom yet, but will probably average down our position once the price levels off some.
Some say you are better off investing in producers unhedged to spot prices than buying a commodity ETF like UNG. It’s not just the cost of the MER. When future prices are in contango (far contracts have higher prices) like natural gas is now, the ETF has another hurdle to overcome: the roll of the contracts toward expiration. Say the fund buys the 4 month futures contract at $20 when the spot price is $15; then as the contract rolls toward expiration, its price declines toward the spot price. So even if the altter stays the same, the ETF will show a loss equal to the MER plus the decline in the futures from $20 to $15. This link explains it more (see Jbiano’s comments especially)
http://etf.seekingalpha.com/article/32864
I should’ve mentioned my time horizon: under 4 months. I want to try timing it and catch a few points on the way up.
Futures are up, hurricane season may soon start, and I see UNG going up. I think a lot of people may buy into this ETF without looking into the MER and other details. Seriously…
Right now I’m 1.5% up after commissions both ways. My target is around 10% net and then I’m out. According to the link you posted this is just the right strategy for UNG (short- to mid-term hold).