Why U.S. Natural Gas Keeps Plunging

As we approach the halfway point for 2012, now's a good time to look back at what's happening with the stocks that interest you. By making sure you know the important things that a company accomplished -- as well as the setbacks it experienced -- you can make a better decision about whether it's a smart investment for your portfolio.

Today, let's take a look at the United States Natural Gas ETF (NYSE: UNG  ) . This exchange-traded fund is designed to track the price of futures contracts on natural gas. But with gas prices hovering near decade lows, the ETF has struggled to hold its ground, although it recently came off its lows of the year. Let's take a quick look at how the ETF is doing so far this year.

Stats on U.S. Natural Gas ETF

2012 YTD Return (30.8%)
Assets Under Management $995 million
Management Expense Ratio 0.60%
Current Price, August 2012 Natural Gas Futures Contract $2.618
CAPS Rating (out of 5) **

Source: S&P Capital IQ.

Why is U.S. Natural Gas losing in 2012?
Given that the U.S. Natural Gas ETF tries to track natural gas prices, the big plunge in those prices in recent years has predictably caused big declines. Huge amounts of natural gas supply have come from advances in recovery technology, including hydraulic fracturing, that made exploiting shale gas areas far less expensive.

The resulting glut has pushed natural gas prices so low that even low-cost producer Southwestern Energy (NYSE: SWN  ) faces a challenge to break even, let alone its higher-cost peers. Natural-gas liquids produced from wells can often help with profitability, but even so, several producers -- including giant Chesapeake Energy (NYSE: CHK  ) and Encana (NYSE: ECA  ) -- have chosen to cut back on their drilling and production in an effort to rein in price declines. Even Ultra Petroleum (NYSE: UPL  ) , which boasts some of the lowest costs in the business, has chosen to cut back on development.

One might wonder why, if spot gas prices are down roughly 13% since the beginning of the year, the U.S. Natural Gas ETF is down more than 30%. The trouble lies in the way the ETF rolls futures contracts forward. Because front-month contracts are generally cheaper than the next-month contract, the fund slowly loses value.

United States Natural Gas hasn't proven to be the ideal energy play. But don't worry; we've got another stock that we think has a better chance to deliver strong gains in the future. Read about it right here in the Motley Fool's special free report on the energy industry and its best prospects.

Click here to add U.S. Natural Gas ETF to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Fool owns shares of Ultra Petroleum and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum and Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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