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From overleveraged Delta Petroleum
The ETF's popularity is easy enough to understand. Like the SPDR Gold Trust
With commodities increasingly viewed by investors as an asset class, such funds are all the rage with pension funds, hedge funds, and retail investors alike. UNG trades more than 20 million shares daily, or well over $100 million by dollar volume. The liquidity here is tremendous, keeping the fund price closely in line with daily net asset value. Nothing frightening so far, right?
The problem with UNG, as well as countless other ETFs that invest in near-month futures contracts, is that the fund's value gets chewed up like a zombie victim as the contracts get rolled from month to month. Compounding this issue of "roll yield" is that the larger the fund gets, the harder it gets to nimbly exit expiring contracts and enter new ones. The fund spreads its roll dates over four days, which in theory should help to minimize the impact of its trading, but I still suspect that other savvy market players are able to game this pattern.
After the past few years' performance -- shares are off roughly 85% since inception -- you'd think that investors would have run away screaming by now. For some reason, though, they just keep getting lured back in. Perhaps there's a mind-control device at work here. That, or investors think they can actually time a recovery in natural gas with great enough precision to avoid getting their faces ripped off by the Negative Roll Yield Mutant.
If you want to trade in and out of this ETF in a matter of minutes or hours, that's your prerogative. For those investors out there who, like me, anticipate an eventual recovery in natural gas prices but want to be able to ride out another year of depressed prices if need be, I'd suggest ditching this frightening fund in favor of a low-cost producer who can survive the current rig invasion. Two companies that potentially fit the bill are Range Resources and Southwestern Energy
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Fool contributor Toby Shute doesn't have a Halloween costume planned, or a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.