Thursday, October 01, 2009

UNG ETF - It Doesn't Pay To Trade It From The Long Side

The ETF for Natural Gas, symbol UNG was down over 6% today after failing to push through overhead resistance at $12. If you compare the top chart with natural gas futures which is in the lower pane, you will notice a very obvious divergence. Natural gas futures have enjoyed a rather nice advance this month taking out the highs from 5 months ago while the ETF (UNG) couldn't even rally above the lows from July!

There is no edge at all trading this ETF from the long side. This ETF does not track the movements of the futures market accurately and is a big disappointment if you plan on trading from the buy side. I guess if the technical signal is there, you're better off shorting this ETF which I did today with my protective stop right above the $12 area. Seems like there is an edge but only if you are short!


Anonymous said...

That difference is what we call contango.

Kevin said...

Exactly...we see that in USO also.

Anonymous said...

In that case you should short USO also, shouldn´t you?
USO was also very affected by contango in the lows, I think shorting UNG here may be like shorting USO near the lows.

Kevin said...

No, USO is in a different trend than UNG. UNG is in a strong downtrend and can't break through resistance.

Anonymous said...

I agree on that statement, it´s just that it makes me remember the bottoming in USO with huge contango taking place at that moment, like UNG in recent times.
Greetings and keep up with the good work.

Kevin said...

I too remember the bottom in USO as I was long and made money but not what I thought I should have made. Being long USO and UNG just doesn't make sense.

Anonymous said...

It appears UNG tracked the natural gas futures quite well from the end of April through August, as shown on your chart. What would explain the gross inability to track since the September bottom?

Do you believe that the UNG etf is permanently impaired (or, at least as long as natural gas futures are priced higher, i.e., contango) due to the mechanics of the etf's roll-over of contracts? Or would you consider this a temporary situation resulting from premium over net asset value (after the sponsor could not / would not open more contract positions last month)?

Is is possible that investor's mistrust of this product is so bad that current holders are steadily selling out until the net asset value "catches up" with UNG's price? Under what conditions might UNG "catch up" with NAV? Why don't the arbitragers work out the "mispricing" of UNG as is done with other etf's? Thanx -Victor

Kevin said...

Hi Victor,

I think the problem is with the spread differential between front month vs back month contracts in the futures markets. This is the reason why UNG has not rallied as much as Natural Gas futures which is quoted based on the price of the front month contract only. This is why being long UNG and USO puts us at a disadvantage.

andi said...

kevin: did you get stopped out of UNG as it went past 12..rather unexpectedly

Kevin said...

I took the trade off. My stop was a bit higher but I chose to exit the position today because Natural Gas Futures is just too strong.


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