ETF Update

Ultimate Guide to Natural Gas Futures, Part 1

Stock quotes in this article: UNG , GAZ  

Individuals concerned about taxes can consult a professional, as either may be appropriate, given individual circumstances. Investors in tax-sheltered accounts may consider either fund.

As for credit risk, it favored UNG until the fund began buying swaps (more below). Now it is a push.

UNG charges 0.97% fees and has a three-month average daily volume of 42 million shares. GAZ charges 0.75% and has a three-month average daily volume of 650,000 shares. On this score, GAZ's volume is adequate for all but the largest investors, and the lower fees make it more attractive.

Premium

A major issue that erupted in summer 2009 was the popularity of UNG and concerns over new CFTC regulations on position size. First, UNG was forced to purchase swaps because it became a huge portion of the market for near month gas futures contracts. Swaps carry counterparty risk, however, which causes it to have similar credit risk to GAZ, albeit less transparent. Concerned that the CTFC may limit how many contracts they can own, both UNG and GAZ stopped issuing new shares. This led to a premium in both funds.

The premium fluctuates daily. As of this writing they are similar, about 10%, but UNG has traded at a higher premium at times, briefly reaching a peak of 20% at one point. If the funds begin issuing shares again, the premium will disappear almost instantly.

You can check the premiums during trading on Yahoo! Finance by finding the intraday indicative value of the fund. Enter ^UNG-IV or ^GAZ-IV as the symbol and compare it to the last price; it is updated throughout the day. (You can substitute any ETF or ETN symbol to get its intraday indicative value.)

Contango

Another issue to consider is extreme contango. Futures contracts can be in contango or backwardation. Contango refers to the situation when near-month contracts are cheaper than contracts farther out in time. Backwardation is the opposite, when near-month contracts are more expensive.
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