Investing in gas ETFs has a certain appeal among savers, who are following the energy sector with great interest, which is on the rise thanks to global demand and economic growth levels that are on the way to recovering from pandemic lows. Let’s analyze how to invest in natural gas ETFs and what are the best solutions available at the moment.
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Gas ETFs: What They Are
Gas ETFs are exchange-traded funds that allow investors to gain exposure to returns based on the performance of natural gas, and thus fall within the broader universe of commodity ETFs. One peculiarity of these funds is the replication mode, which can only be done synthetically. This means that gas ETFs are indirectly exposed to the performance of this fossil fuel, i.e. through the purchase of derivative contracts, typically futures, with natural gas as the underlying.
What Influences the Gas Price
We know that natural gas is a raw material extracted in various parts of the world, especially in Russia, Iran and the United States, but what influences its price? The price of gas follows the trend of supply and demand, but it also hides a much more complex picture in which financial, political and strategic factors play a primary role.
In particular, the factors that determine its quotation are:
- Geopolitical situation, among the main gas producers there are in fact countries that are in a situation of great political uncertainty, this means that the price of this raw material can be strongly influenced by the tensions that occur in those regions;
- Oil price, when the price of black gold rises sharply, the value of natural gas also rises;
- Value of the US dollar, the price of gas is expressed in USD, it is therefore obvious that a drop in the value of this currency often leads to an increase in gas prices.
How to Invest in ETFs
Every bank now offers the possibility to trade ETFs, but the preferred way for investors is to lean on a CFD broker. In fact, for Italian citizens some Gas ETFs can only be purchased through CFDs (Contracts For Differences), so it is necessary to choose from the beginning a reliable and regulated online broker that allows trading through contracts for difference, such as eToro. As with other ETFs, eToro allows you to trade with leverage, so with a limited deposit put up as collateral you can sign contracts for a much higher value.
If you are not accustomed to dealing with CFDs, we remind you that these are derivative financial instruments whose use does not involve the physical exchange, in this case of gas, but allows you to profit from the change in value of the commodity at the expiration of the contract.
The Best Gas ETFs: Quotation and Technical Analysis
Having outlined the general characteristics of exchange-traded funds on natural gas, we are now ready to explore the best Gas ETFs, some of which are also listed on Borsa Italiana.
The first Gas ETF we present to you is the UNG US Natural Gas Fund, the only one dealing only with natural gas. This is a fund available on the U.S. stock exchange that aims to replicate the price of natural gas futures contracts listed on the NYMEX (New York Mercantile Exchange). Features not to be underestimated are the low spread and high volatility.
Among the most interesting solutions is the SPDR S&P Oil & Gas Explore & Prod ETF (XOP), which aims to replicate the performance of the S&P Oil & Gas Exploration & Production Select Industry index. The latter is an index that tracks all trades occurring on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges.
Another benchmark fund is Wisdomtree Natural Gas, a natural gas ETC also available on Borsa Italiana. This fund is issued by Wisdomtree Commodity Securities Limited in order to provide investors with “total return” exposure in natural gas by replicating the Dow Jones-Ubs Natural Gas Subindex and generating a gain from collateral.
Among the best Gas ETFs, we also point you to Wisdomtree Natural Gas 3x Daily Lev, which multiplies the performance of the NASDAQ Commodity Natural Gas ER index by 3 and has such volatility that it has recorded -70% per year over the last period.
Finally, if you want to bet on a fund’s trend continuing downward, it might be worth evaluating the WisdomTree Natural Gas 1x Daily Short ETC, which invests downward and offers a return contrary to the Dow Jones-Ubs Natural Gas Subindex Index.
Benefits and Risks of Investment: Is it worth it?
Natural gas is a much cleaner resource than other fossil sources and can therefore play an important role in the transition towards a more sustainable economy. In order to understand whether or not it is worth investing in natural gas ETFs, it is necessary to monitor the market, keeping an eye on the performance of the best gas ETFs both in the short and long term.
What is certain is that, thanks to their low costs, these funds are an increasingly popular choice among investors, attracted also by their transparency, flexibility and tax efficiency. Since they are traded on an exchange, as is typically the case with equities, natural gas ETFs allow investors to diversify their portfolios at a lower cost than traditional mutual funds.
By holding futures contracts, ETFs are exposed to a particular type of risk called contango, which occurs when the expiring future is sold at a lower price than the consideration paid to buy the new future. To limit this risk as much as possible, our advice is to hold gas ETFs only for short-term speculation.