ETF Expert

Closed-end mutual funds (CEFs) have a fixed number of shares. For this reason, they often trade at a discount or a premium to the underlying net asset value of what the fund is holding.  It follows that many folks prefer to buy a CEF when a prospective investment is trading at a discount.

Exchange-traded funds (ETFs) are designed to trade as close to their underlying net asset values as possible. Since they do not have a fixed number of shares, it is the public that determines whether more shares or less shares are needed. At least that’s the way they are supposed to work.

Well… along came the United States Natural Gas Fund (UNG).  With a free fallin’ U.S. economy, a frothy commodity bubble (i.e., hedge fund speculation), unprecedented levels of successful gas exploration (i.e.,  excess supply) as well as a cool, cruel summertime (i.e., muted demand), prices fell 80%. And they still haven’t snapped back a la crude oil.

The fact that they haven’t snapped back has fueled an ongoing controversial debate about natural gas prices, natural gas futures as well as investing in natural gas via the United States Natural Gas Fund (UNG). Specifically, the more UNG dropped, the more speculative investors clammored for a piece of this exchange-traded fund. It jumped from $720 million to $4.2 billion dollars in assets and 45 million shares, hitting an approval limit for share issuance.

More controversy ensued. Effectively, if the fund was going to represent a fixed number of shares, investors in UNG would have to accept the fact that it no longer represented the actual net asset value of the positions in the fund. In fact, UNG is trading at about a 4% premium to the actual underlying gas future contracts.

Ironically, the issue was supposed to be solved when approval for the creation of more shares came through… and that approval came through on Wednesday, 8/12/09. However, the Commodity Futures Trading Commission (CFTC) is likely to increase regulation and mandate limits on how much exposure an ETF like the United States Natural Gas Fund (UNG) may have. It followed that the management for UNG has decided NOT to accept the issue of new shares, leaving UNG to trade like a closed-end fund after all.

This is clearly a case of “Stay Tuned.” I don’t believe UNG can surge to an elevated price and anchor itself; that said, economic improvement alongside support for natural gas in Congress as well as heavy hitters predicting $3.30 NG going to $6 or $7 may result in a trader’s profit.

UNG Natural Gas 1 Year

If you’d like to learn more about ETF investing… then tune into ”In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Tags | "etf gas", "etf natural gas", "gas etf", "natural gas etfs"