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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The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

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The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

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Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.