The Premium’s Eroding For UNG

The topic that’s discussed most on my radio show ( every day seems to be natural gas.  For a longer-term trade, I still think it makes a lot of sense especially if one shorts oil versus natural gas.  The easiest way to play natural gas has been UNG the past several months.  But, in early summer, I exited UNG because of the internal composition of the ETF.  There was chatter that the CFTC would limit contracts, etc. for speculation in gas & oil and other contracts.  In fact, UNG was about 30% of the daily volume of gas contracts.

At that point, UNG stopped issuing new shares.  That meant that even though there was demand for UNG, the fund wasn’t issuing new shares causing a distortion.  The distortion basically made UNG into a closed end fund where the fund was trading at a premium to natural gas.  Remember, closed end funds have a set number of shares and therefore trade at a discount or premium to the NAV.  Open end funds issue new shares every time you make a deposit causing the fund to trade at the NAV price.

At one point in the past few weeks, UNG traded at almost a 20% premium to natural gas.  I warned many of you to avoid UNG.  I continued to like natural gas but thought owning natural gas companies was a better way to get the exposure.  Funds like the Fidelity Select Natural Gas Fund (FSNGX) made more sense to me.  UNG decided to issue more shares this week.  That meant that the premium in UNG compared to gas would disappear.  Sure enough, if you look below you can see the premium vanishing.


For the week, natural gas finished up almost 28% versus UNG which only rose 10%.  So, the premium almost entirely eroded just this week (still about 5%).  You might ask what’s the big deal?  UNG still went up.  But, what if natural gas had fallen 10% this week.  UNG could have fallen almost 30%.  Fortunately, natural gas was up.  But, UNG investors got left behind.

I’d still stay away from UNG for now because there is still a premium.  If you’re still bullish on gas, own the companies.  It’s the easiest way to get exposure.


5 Responses to “The Premium’s Eroding For UNG”

  1. 1 Gary L. Goss September 18, 2009 at 8:07 pm

    The continuous contract for NG has gapped above the 200 day SMA. Does this show strength – if yes, how important is the gap?

  2. 3 Clem September 19, 2009 at 6:01 am

    Thank you for this post on UNG! Thanks for explaining how UNG pricing fits into the bigger picture of natural gas!

  3. 4 James September 20, 2009 at 11:07 pm

    Earlier this year, myself and others have been repeatedly writing on your blog warning about UNG. I was surprised when you used UNG as part of your pairs trade. Why only until early summer did you decide that this was a flawed instrument? A possible alternative may be GAZ, its a exchange traded note.

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