The first natural gas fund, United States Natural Gas Fund (AMEX: UNG), was launched by Victoria Bay Asset Management in April and has gathered $73 million in assets so far. It is designed to track, in percentage terms, the movement of natural gas prices, and is managed so that its positions in natural gas interests are not usually leveraged. The fund invests in listed natural gas futures contracts and other natural gas-related futures, forwards, and swaps contracts.
United States Natural Gas Fund has a 0.60% expense ratio that does not include commissions incurred from trading natural gas futures contracts, which are estimated to be around 0.10%.
Commodity risk
Since the natural gas industry and its products price tend to be volatile, the risks for a fund invested in this commodity can be high. The positive of volatility is that the price of natural gas and oil can differ, which means that this fund could provide diversification benefits for the energy portion of your portfolio.
Another risk of United States Natural Gas Fund is that it may also invest in negotiated natural gas interests that could expose it to the risk that counterparties don't fulfill their obligations. These contracts could be illiquid and that might also make it difficult for the fund to unload its positions.
Not quite an ETF
Although it might trade like an ETF and is listed on an exchange, United States Natural Gas Fund is an exchange-traded security, not an ETF, a fact that may give some investors gastrointestinal pain. That's because the fund is designed as a commodity pool and is organized as a Delaware limited partnership. This distinction is important, because it means you don't have the protections provided to ETFs under the Investment Company Act of 1940. The differences between these two types of investment pools can be significant. ETFs, for example, have restrictions on investments, transactions between the fund and the adviser, as well as restrictions on debt and an express private right of action for shareholders.
Tax consequences
No federal income tax will be paid by the fund, nor does the fund plan to make any distributions. This means that in any year the fund realizes an income/gain, investors in the fund will be required to report their allocable share of such income/gain/losses or deductions.
United States Natural Gas Fund is the first fund option for investors who want to hedge natural gas movements. The fund makes it easy for investors to get commodity-like exposure and doesn't require an investor to open a commodities futures account. However, the fund's limited performance history makes it difficult to determine how well it will track natural gas prices. It offers another option to investors who want to diversify their energy investments, and more choice is always good.
Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds mentioned in this article. The Motley Fool has a disclosure policy.
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