Reviewing The United States Natural Gas Fund, A Gas Benchmark Tracker

As the world focuses on energy and oil prices, the United States Natural Gas Fund (UNG) is ideally placed as it tracks the price action of natural gas, an important energy commodity for the US.

Managed by United States Commodity Funds, LLC (formerly Victoria Bay Asset Management, LLC), the UNG is a natural gas ETF (exchange traded fund), launched on 18 April 2007, offering investors exposure to the price of natural gas.

United States Commodity Funds, LLC is registered with the Commodities Futures Trading Commission as a commodity pool operator and had $1.9 billion assets under management in June 2008.

Let’s review what this fund does and how you might consider using it as a means of gaining exposure to the natural gas markets.

What does the fund consist of?

UNG is a US commodity based exchange traded security set up as a Delaware limited partnership which creates units that can be bought and sold on the American Stock Exchange.

Minimum trade size is 1 unit and trades move in increments of $0.01.

It tracks the price movements of the near month Nymex natural gas futures contract, a very actively traded contract and the main US natural gas benchmark.

This reflects the price of natural gas for physical delivery to the Henry Hub in Louisiana.

Like crude oil, natural gas is a very important commodity in the global economy and key for energy security.

Within two weeks of expiry of the near month contract, the natural gas benchmark will then be the futures contract for the next month.

The average daily percentage change in the Net Asset Value (NAV) of the UNG over any rolling 30 day period is designed to closely track the average daily percentage change (+/-10%) in the price of a specified natural gas futures contract on Nymex, less the fund’s expenses (management expense ratio, 0.6%).

United States Natural Gas Fund will be made up of exchange listed natural gas futures contracts and other natural gas related futures, forwards, and swap contracts.

The fund will also hold US government bonds of two years or less maturity as well as cash funds to meet collateral requirements.

What are the benefits of investing in the UNG exchange traded fund?

• As a natural gas ETF it is a convenient way of gaining exposure to this growing market
• An investor or trader can hedge against movements in natural gas prices or use the fund with a view to make a capital gain over a period of time
• The fund offers certain flexibility such as stop limits, stops and good until cancelled orders
• Availability of daily values for market price, net asset value (NAV)

What should you consider as a potential tracker investor, trader, hedger in the United States Natural Gas Fund, LP ?

Essential requirements:

• Consult your professional financial adviser before committing any funds to these investment vehicles, so that your overall financial aims can be achieved.
• You should consult your tax adviser with regard to the effect of US Federal income tax on an investment in UNG.
• You are strongly advised to get a copy of the Prospectus and study the contents carefully, and ultimately only decide to invest based on the information in this document.
• Please note this investment vehicle is only available to US investors.

What are the risk factors involved investing in these exchange traded funds?

• Past performance is no guide to future results
• This fund is not designed to distribute income or dividends
• UNG aims for its NAV to track closely the natural gas futures contract price. It does not set out to use leveraged positions (with significantly higher risks) to achieve greater gains
• United States Natural Gas Fund is not a registered investment company so as an US investor you would not be protected by the Investment Company Act 1940
• As a general observation, by their very nature commodities and futures contracts are volatile, so as an investor or trader you could lose substantial amounts of your capital.

So if your professional adviser thinks a natural gas ETF is a good vehicle for your investment goals and you have understood the prospectus and tax issues, then the United States Natural Gas Fund seems like an appropriate way of tracking the Nymex benchmark for the natural gas price.

The broad consensus is that natural gas prices will remain strong and this is reflected by the emphasis on securing long term contracts for delivery of liquefied natural gas (LNG) to the US from global markets and the extra infrastructure development to handle gas distribution.

Global energy demand will continue to grow for the foreseeable future and as oil reserves dwindle, natural gas will inevitably take up the slack.

There is also the issue of global warming and natural gas used for electricity generation, for example, is less carbon intensive than using crude oil and coal.

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