United States Natural Gas Fund (NYSEMKT:UNG) is another way to take part in the natural gas market. The downside with simple commodity ETFs is that cotango costs eat into profits and can cause strong tracking errors. The widening spread between the spot price and the ETF price in the above chart clearly shows this problem. Over time the ETF moves further way from the underlying commodity.
The upside of the U.S. Natural Gas Fund is that it is widely traded and offers direct exposure to changes in the natural gas. An investment thesis based upon natural gas prices can be difficult to execute through equity investments. A company’s stock price will be affected by a number of company specific factors and this ETF helps to avoid these issues.
Invest with Caution
Clean Energy Fuels Corp (NASDAQ:CLNE) and Westport Innovations Inc. (USA) (NASDAQ:WPRT) both play a critical part in helping to bring natural gas out of its doldrums, but they are not surefire investments. Natural Gas is a very volatile commodity and a suddenly substantial increase in price could serious decrease demand for natural gas from the transportation sector. At the same time the U.S. Natural Gas Fund is not a great long term investment with its significant tracking error.
Natural gas is setting itself up for a bull market, but investors need to remember the risks of each investment vehicle. For the very risk adverse it is probably best to invest in larger integrated energy firms that offer exposure to natural gas in addition to other markets.
The article Natural Gas Transportation Is Calling in the Bulls originally appeared on Fool.com and is written by Joshua Bondy.
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