While the shortcomings of ETFs that track commodities have been well documented, the discrepancy between the price of natural gas and the ETF that is meant to track its price provides a great reminder of why many of these more exotic vehicles should be avoided. As always, investors should know what they own and look into these vehicles before investing in them.
The chart below compares the YTD performance of the front month natural gas futures contract and the United States Natural Gas Fund (UNG). Through the end of August, natural gas and UNG were both down similar amounts and had tracked each other relatively closely. Since then, however, natural gas has made a major reversal and is actually up on the year. UNG, on the other hand, remains down over 55%. In essence, UNG holders have missed out on the entire rally.
While the explosion in popularity of ETFs has had many positive effects and created numerous efficiencies for investors, the boom in the industry hasn’t been void of some individual busts.