Natural Gas ETFs- UNG, BOIL and KOLD Explained

The price of Natural Gas changes every moment as it publicly traded on an exchange. There are several ways to trade this commodity and its price, and it doesn’t involve purchasing real natural gas barrels. The easiest way to trade Natural Gas is by buying ETFs such as UNG, which tracks the performance of Henry Hub Natural Gas, or the leveraged BOIL and KOLD. $BOIL offers x2 The Bloomberg Natural Gas Subindex returns while $KOLD is an inversed version of it.

When it comes to trying to gain exposure to natural gas, futures contracts are typically outside of the realm of the average investor. Therefore, there are a number of ETFs (“Exchange Traded Funds”) specifically dedicated to betting on the futures of natural gas. Some of them offer leveraged exposure, allowing investors to make big bets. Note that those leveraged exposures ETFs are meant for trading, not for long-term holding. It means that traders who trade those ETFs are intending to profit from the daily price fluctuations in the commodity, rather than its “real value”.

# Natural Gas ETFs

As mentioned, you can trade Natural Gas through a fund that trades on a stock exchange, like the United States Natural Gas Fund (UNG). Or, the more volatile options (moves two times as much each day), the X2 Long Natural Gas ETF (BOIL), and its inversed fund – X2 Short Natural Gas ETF (KOLD).

The UNG aims to track the daily percentage changes in natural gas prices. For example, if natural gas prices go up by 1% – then UNG would rise around 1%. More specifically, UNG uses futures contracts for natural gas to be delivered at Henry Hub, Louisiana to measure these daily percentage changes.

To track the changes in UNG, BOIL, and KOLD, you’d better watch the commodity chart rather than the ETFs. The charts you’d like to follow are NGAS (Henry Hub), NATGAS (OANDA), and NG1! (Natural Gas Futures).  They will help you grasp the whole picture of natural gas’s current situation in the market, and get to an educated conclusion about its trend-line and which direction would it go next.

# BOIL and KOLD Leveraged Natural Gas Returns for Sophisticated Traders with High Risk-Tolerance

These ETFs such as BOIL and KOLD are risky. You should conduct your own due diligence before trading them. They are intended for short-term trades only, as written in its prospects:

The Natural Gas Funds are linked to an index of natural gas futures contracts, and are not directly linked to the “spot” price of natural gas. Natural Gas futures contracts may perform very differently from the spot price of natural gas.

The Natural Gas Funds are not directly linked to the “spot” price of natural gas. The price of a futures contract reflects the expected value of the commodity upon delivery in the future, whereas the spot price of a commodity reflects the immediate delivery values of the commodity. While prices of swaps, futures contracts and other derivatives contracts are related to the prices of an underlying cash market (i.e., the “spot” market), they may not be well correlated and have typically performed very differently.

Natural gas futures contracts typically perform very differently from, and commonly underperform, the spot price of natural gas due to current (and future expectations of) factors such as storage costs, geopolitical risks, interest charges incurred to finance the purchase of the commodity, and expectations concerning supply and demand for the commodity. Derivatives contract prices may not be correlated to spot market prices and may be substantially lower or higher than the spot market prices for a number of reasons, including as a result of differences in derivatives contract terms or as supply, demand or other economic or regulatory factors become more pronounced in either the cash or derivatives markets.”

Furthermore, there is a management fee you should be aware of, although it’s negligible:

Each Fund pays the Sponsor a management fee (the “Management Fee”), monthly in arrears, in an amount equal to 0.95% (0.85% for ProShares VIX Mid-Term Futures ETF) per annum of its average daily net assets. “Average daily net assets” is calculated by dividing the month-end net assets of a Fund by the number of calendar days in such month. No other Management Fee are paid by the Funds.”

While some would suggest you to avoid ETFs due to their high fees, you can see it is only a fraction (at least in Natural Gas Leveraged ETFs and other ProShares ETFs), and because of their high returns (or losses), a trader who trades these ETFs should be tolerant enough to losses.

# BOIL vs KOLD

TickerETFExposure
$BOILx2 Long Natural Gas ETF200%
$KOLDx2 Inverse Natural Gas ETF-200%

Note that $BOIL and $KOLD correspond to two times the long/inverse of the daily performance of Bloomberg Natural Gas SubindexSM, which is a benchmark of an index of natural gas futures contracts, and not intended to track the performance of the spot price of natural gas.
After the above being said, these ETFs, traded wisely and carefully, can make you a lot of gains.

If you’re interested in learning more about the commodity itself, which is highly recommended to learn about the underlying asset of every ETF you own, for better trading decisions:

 

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