Natural gas ETF now 86 percent of market

Bloomberg reports on the consensus amongst traders and investors that the price of natural gas has nowhere to go but up, yet it keeps going down ... a lot.

The United States Natural Gas Fund expanded today to the largest position in its 27-month history as investors snapped up the last of its shares and it awaited government approval to issue more units.

As of early today, the exchange-traded fund owned the equivalent of 124,926 natural gas futures contracts on the New York Mercantile Exchange. The number of shares outstanding reached a record yesterday, rising 14.5 percent to 322.3 million, more than 10 times the total at the start of the year, and worth $3.97 billion.

The fund’s natural gas position, spread across swaps and futures on the Nymex and the ICE over-the counter-market, equals the equivalent of 86 percent of the open interest in natural gas futures on the NYMEX.

“Clearly, this has become an extraordinarily attractive investment,” said Dave Nadig, an associate editor at IndexUniverse.com, in Decatur, Georgia. “There’s a lot of speculation among people like us who are wondering who is in this.”

The ETF can’t grow further for now because yesterday it ran out of new shares to issue. The ETF asked the Securities Exchange Commission on June 5 for permission to create 1 billion new shares, and is awaiting approval.

One of the interview subjects for the story noted that the total value of the futures contracts holdings for the United States Natural Gas Fund (NYSEArca:UNG) are now so large that they are creating distortions in the market. Duh...

Here's the chart - a pretty ugly picture, unless you sold last summer.
The model portfolio at Iacono Research had a small position in this ETF last year - bought it at around $45, watched it go up to over $60, and then sold it at around $25 late in the year.

Fortunately, this was the exception to the rule for energy positions last year as a number of sales of crude oil ETFs at mid-year worked out much, much better.

Little did I know there was another 50 percent to be lost with UNG if only I'd have stuck with it for just a little while longer.

Full Disclosure: No position in UNG at time of writing