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By Bill Carrigan
Investments Columnist
A few weeks ago I used this space to say that when it comes to analysis of the capital markets, “to know and not act — is to not know.”
The knowing part is I believe we have a new long term bull market in natural gas.
Our chart this week is the weekly closes of NYMEX natural gas spanning about three and one half years. Note the nasty 14-month bear from the mid 2008 peak of over $13 to the lows of under $3 posted in September 2009. Note the subsequent rally from the September 2009 lows followed by another decline to the lows posted in October 2010.
This is important technically because the higher October low simply means the price of natural gas is no longer going down.
I could suggest some fundamental reasons to support the technical argument such as natural gas accounting for about a quarter of U.S. electricity generation with power demand tending to rise along with air conditioning use during the summer. Pile supply issues of a new Atlantic hurricane season and the controversy over hydraulic fracturing relating to shale extraction methods.
The acting part is I am not to sure how to profit from my analysis.
My problem is how to acquire the ownership of natural gas. Do I use the futures markets or just buy one of those gassy exchange traded funds (ETFS)?
The futures market has some issues. That is because unlike a stock certificate, a bond or a hard commodity like gold or silver, how does one take physical delivery of 10,000 million British thermal units of natural gas? Of course I could also buy the front contract month and upon expiry roll into the next front month. But then again I could acquire an ETF that will do the work for me.
Currently there are three types of commodity-related ETFs.
Physical Based: These products track the spot price by holding the actual commodity. One example is the popular SPDR Gold Trust that trades on the NYSE under symbol GLD. The problem is there are storage costs and many “soft” commodities have storage issues such as pork bellies and live cattle.
Equity based: These products own a basket of equities that are related to a specific commodity such as base metal stocks (copper), precious metal producers (gold & silver), forest stocks (lumber) and potash stocks (wheat, corn & soybeans). The problem here is the equity-based ETF price may not necessarily correlate with the price of the related commodity. One example would be the TSX-listed iShares S&P/TSX Global Gold Index Fund (XGD).
Futures Based: These products track the price by acquiring the futures contracts of different commodities. The advantage here is the broader access to the commodity universe and lack of storage fees. The big disadvantage is the contango issue of losing on a roll from an expiring front month into a higher priced month. One example would be the TSX listed Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU).
At the moment the equity-based ETF product seems to be the only option because there are no physical based products available and the futures-based products are not buy-and-hold due to the roll-over problem.
In other words if I wish to adopt a long term buy-and-hold position in the natural gas complex I have to rule out futures based products like United States Natural Gas Fund, LP (NYSE: UNG), the Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU) and the Claymore Natural Gas Commodity ETF (GAS).
I have now narrowed my gassy options down to either the selection of equity-based ETFs or to engage in stock picking.
For Canadian dollar accounts one option would be the BMO Junior Gas Index ETF (ZJN). According to BMO Financial Group The ZJN has been designed to replicate, to the extent possible, the performance of the Dow Jones North America Select Junior Gas Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.
For U.S. dollar accounts one option would be the SPDR S&P Oil & Gas Exploration & Prod (XOP). According to State Street Global Advisors the XOP uses a passive management strategy to track the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Experienced investors could engage in stock picking but that requires extra homework and perhaps the assistance of an experienced advisor.
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发表于 2011-6-13 09:12 AM
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