Natural gas futures have been notoriously fickle over the years and can be classified as a particularly high-risk, high-reward segment of the market. Even by its own volatile standards, natural gas has had a remarkably turbulent year. Seasoned commodities traders don’t call natural gas futures “the widowmaker trade” without reason. Natural gas is down 49.4% year to date and also 49.7% over the past year. It’s also down an incredible 35% in the past month.
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Clearly, investing in a commodity like this is not for the faint of heart, but the volatility here presents opportunities for risk-tolerant investors and traders. For these types of traders, there are two ETFs from ProShares that provide even more pronounced returns based on the dramatic price swings of the natural gas market. Before delving into these ETFs, let’s take a look at why natural gas prices have been slumping.
What is Natural Gas?
As a brief primer for investors who are unfamiliar with this commodity, natural gas is used for heating. It is also used for power generation by the power plants that provide electricity to homes and businesses. It is also used in industrial processes and as a feedstock in paints and plastics. These uses make natural gas a crucial commodity for day-to-day life in much of the world.
What’s Going on With the Natural Gas Market?
Natural gas prices increased in early 2022 following the start of the war in Ukraine. Russia was a major provider of natural gas to Europe. However, it shut down natural gas supplies to the continent in response to sanctions. This led to a pull-forward of demand for natural gas from the U.S. and other suppliers, causing prices to spike.
An old commodity investing adage says that the cure for low prices is low prices. Similarly, the same can be said for high prices, and these elevated natural gas prices led to increased production. This demand has given way to oversupply due to this increased production and a warm winter in the U.S. and Europe, causing natural gas prices to plummet.
Unfortunately for natural gas bulls, relief doesn’t appear to be on the horizon any time soon. The U.S. Energy Information Association (EIA) says that “We expect prices to stay nearly the same in 2024 as dry natural gas production continues to grow in the United States and outpaces domestic natural gas demand and exports for most of the year.”
While things have been bleak for natural gas bulls, an old investing adage from Warren Buffett says that investors profit from “being fearful when others are greedy, and greedy when others are fearful.” By this logic, it could be time for risk-tolerant investors to kick the tires on natural gas.
As discussed, the cure for low prices is low prices, so if current prices lead to lower production, that could eventually be a tailwind for pricing. Also, the EIA expects the Freeport LNG facility in Texas to come back online during the first quarter (after it was shut down last summer because of a fire), which will add to demand capacity.
Further out, by 2024, several new LNG export facilities will be coming online in the United States. This should significantly increase capacity for demand because U.S. companies will be able to export more natural gas overseas.
ProShares Ultra Bloomberg Natural Gas ETF (BOIL)
The ProShares Ultra Bloomberg Natural Gas ETF is a vehicle that “seeks daily investment results, before fees and expenses, that correspond to two times (2x) the performance of the Bloomberg Natural Gas SubindexSM for a single day.”
What this means is that on a day when natural gas rallies, BOIL holders will enjoy an even bigger return. However, on days when natural gas prices fall, BOIL holders will essentially experience twice as much pain.
Natural gas prices have plummeted, so it comes as no surprise that BOIL is down 64% year-to-date. BOIL is also down 89% over the past year. At a price of $4.42 today, the ETF is down an incredible 97% from its 52-week high of $140.50.
BOIL has just over $1.1 billion in assets under management (AUM) and a relatively high expense ratio of 1.33%.
ProShares UltraShort Bloomberg Natural Gas ETF (KOLD)
For every action, there is a reaction, and this is true of natural gas ETFs. While BOIL seeks to correspond with two times the daily performance of natural gas for a single day, the ProShares UltraShort Bloomberg Natural Gas ETF seeks the opposite. KOLD seeks to provide investors with “two times the inverse (-2X) of the performance of the Bloomberg Natural Gas SubindexSM for a single day” before fees and expenses.
While warm winter weather was bad news for BOIL, it has been a massive tailwind to KOLD. KOLD has surged to an incredible 105% gain year-to-date less than two months into 2023. Trading at $81.05, KOLD is also up nearly 800% from its 52-week low of $9.06. However, the volatile ETF is still down 28% over the last year, even when accounting for this massive gain. This indicates that KOLD is more of a vehicle to trade rather than a long-term buy-and-hold.
KOLD is much smaller than BOIL, with about $118 million in assets under management. It also has a similar expense ratio of 1.56%.
Something for Everyone
In conclusion, natural gas is a historically volatile asset in and of itself. Vehicles like BOIL and KOLD add even more volatility into the mix by providing twice the performance of Bloomberg’s natural gas index.
These ETFs aren’t for the faint of heart or for the average buy-and-hold investor. Nevertheless, for active traders and investors looking to profit from a particularly bullish or bearish view on natural gas, BOIL and KOLD can be useful tools to add to a portfolio.
Further, investors who are interested in natural gas but unwilling to take on this much volatility have other options. These investors can consider investing in the equity of natural gas companies like Antero Resources (NYSE:AR), Chesapeake Energy (NASDAQ:CHK), or Southwestern Energy (NYSE:SWN), to name a few. Alternatively, many oil majors like ExxonMobil (NYSE:XOM), Shell (NYSE:SHEL), and TotalEnergies (NYSE:TTE) are also major producers of natural gas.
Investing in these oil stocks gives investors some exposure to natural gas while also offering exposure to oil and the added bonus of substantial dividend yields.
