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Investing in Natural Gas with ETFs

Investment case

Increasing world demand for energy combined with supply constraints for oil and environmental concerns for nuclear and coal create a promising future for the natural gas industry.

Increasing Demand

According to the U.S. Energy Information Association, worldwide consumption of natural gas is projected to increase by nearly 64 percent between 2004 and 2030. Among the end-use sectors, the industrial sector remains the largest consumer of natural gas worldwide, accounting for 42 percent of the total increase in demand for natural gas between 2004 and 2030. Natural gas also is expected to remain an important energy source in the electric power sector, particularly for new generating capacity.

With U.S. consumption of natural gas projected to increase only slightly, the majority of the growth in gas consumption will happen internationally.  However, the U.S. DOE's projections assume large increases in production of coal and non-hydro renewables which have yet to prove themselves.

Concentrated Supply

On the supply side, world production of dry natural gas is dominated by the United States (18.1 Tcf) and Russia (22.6 Tcf), whose combined gross production accounts for about 40 percent of the world's total.  Future world production growth is most likely to come from outside of the U.S.

Multiple Ways to Invest

Investors can gain exposure to the growth in the natural gas industry through companies involved in exploration and production of natural gas.  Indirect exposure can be gained through companies that provide oil and gas equipment and services.

A third way to invest in natural gas is through exposure to commodity prices in either the spot and or futures markets.

Overview

Natural Gas ETFs are a good way to invest in the world's ever growing demand for energy. Several flavors of natural gas ETFs are on the market to match almost every variation of risk appetite.

 

Exporation and Production

First Trust Advisors offers the ISE-Revere Natural Gas ETF (FCG) which tracks an index of 30 companies that derive a substantial portion of their revenues from the exploration and production of natural gas. Top holdings as of 2/14/08 include Delta Petroleum (Nasdaq: DPTR), Cabot Oil & Gas (NYSE: COG) and Petroleum Development Corporation (Nasdaq: PETD).

The SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP) tracks an index of oil and gas exploration and production companies.

Top holdings as of 2/14/08 included:

• Exxon Mobil (NYSE: XOM)

• Chevron (NYSE: CVX)

• Conocophillips (NYSE: COP)

• Occidental (NYSE: OXY)

• Devon Energy (NYSE: DVN)

iShares also offers an Exploration and Production ETF, the Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO).

 

Equipment and Services

State Street offers the SPDR® S&P® Oil & Gas Equipment & Services ETF (XES) which tracks an index of oil and gas equipment and services companies.

Top holdings as of 2/14/08 included:

• Schlumberger Ltd. (NYSE: SLE)
• Transocean Inc New (NYSE: RIG)
• Halliburton Co (NYSE: HAL)
• National Oilwell Varco Inc (NYSE: NOV)
• Weatherford International (NYSE: WFT)

Another Oil & Gas Services ETF is the PowerShares Oil & Gas Services Portfolio (PXJ) which is based on an index that takes a fundamental approach to picking stocks that are likely to outperform the industry.

 

Commodities

ETF Securities sponsors a Natural Gas ETF (NGAS.L) that is tied to an index of natural gas futures. The sub-index is an "excess return" index and the interest component combines to give a total return investment.

Victoria Bay recently launched the United States Natural Gas Fund (UNG) which tracks changes in the price of natural gas by investing in short term futures contracts.

 

Leveraged ETFs

ProShares offers two leveraged ETFs that provide exposure to the U.S. Oil and Gas Industry.  Ultra Oil & Gas (DIG) targets returns that are 200% of the daily performance of the Dow Jones U.S. Oil & Gas Index.  UltraShort Oil & Gas (DUG) targets returns that are 200% of the inverse of the daily performance of the same index.

Top Performers

Largest Natural Gas Commodities ETF

United States Natural Gas Fund (UNG) -$586 million

Largest Natural Gas ETF

First Trust ISE-Revere Natural Gas Index Fund (FCG) - $138 million

Largest Oil & Gas Exploration and Production ETF

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) - $498 million

Largest Oil & Gas Equipment and Services ETF

PowerShares Oil & Gas Services Portfolio (PXJ) -$416 million

ETFs to show per page:
ETF Name Ticker Asset Class Yield Size ($MM) Expense Ratio (%) Sponsor
ETF Name Ticker Asset Class Yield Size ($MM) Expense Ratio (%) Sponsor
ETFS Natural Gas NGAS Commodities 0.0 19 0.49 ETF Securities
First Trust ISE-Revere Natural Gas Index Fund FCG Equities 1.1 728 0.60 First Trust
iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN GAZ Commodities 0.0 125 0.75 iPath
United States Natural Gas Fund UNG Commodities 0.0 2,216 0.60 US Commodity Funds
United States 12 Month Natural Gas Fund UNL Commodities 0.0 39 0.89 US Commodity Funds

Executive Summary:

•   Concentrated supply and increasing global demand for energy support positive outlook

•   Traditionally used for heating and industrial applications, natural gas can be converted for use in electricity generation and transportation

•   Multiple ways to gain exposure with ETFs:

Pure Play: FCG

Commodities: UNG, NGAS.L

Oil & Gas Exploration & Production: XOP, IEO

Oil & Gas Equipment & Services: XES, PXJ

Leveraged Oil & Gas Industry: DUG, DIG



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