UNG- The Cautionary Tale

Every month, we publish a table that compares popular long-only commodity fund performance with the results of purchasing a December futures contract in the same commodity and rolling that contract annually. Typically, the futures contract outperforms- but this has always been most clear in Natural Gas and the UNG fund. As if you needed more convincing to stay away from those long-only funds, IndexUniverse reports:

The winner … or should I say the loser … of the worst-performing ETF contest is the United States Natural Gas ETF (NYSEArca: UNG).

Like most of the other products profiled here, UNG is actually a great ETF. It tracks well, trades extraordinarily well and provides exactly the exposure it claims to provide: exposure to front-month natural gas.

Unfortunately, as mentioned in the GAZ writeup, that’s been a terrible place for investors to be. With sharp contango and declining prices, UNG has dropped 96 percent of its value since inception. Investors have poured $4.3 billion in cash into the ETF, and it only has $712 million left.

Performance has been so bad, in fact, that UNG has now had to do two reverse splits: a 2-for-1 split in March 2011, and a 4-for-1 split in February of this year. The fund closed today at $14.58; if current trends continue, another split could be necessary in a few more months.

UNG Lifetime Performance

How many people do you think piled into this thinking they were investing in a long-term bet on natural gas instead of just the front month performance? How much of that $4 Billion even understands the difference between front month performance for a commodity and its long term performance? There’s no way to know, but we’d guess it’s at least half of that number – showing you need to do more than just look at an ETFs name and assume it gives you the exposure its name implies.

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