Natural Gas ETF

By: EconomyWatch   Date: 30 July 2009

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A natural gas ETF is an exchange traded fund that invests in natural gas futures and other natural gas related financial products. Natural gas ETFs try to track the market price of natural gas. These ETFs are set up as commodity pools.

 

Commodity pools are those funds that collect investments for use in futures and commodity options trading. The investment pool enables smaller investors to trade in a high cost zone without assuming significant risks. Natural gas ETFs represent limited partnership interests as compared to shares.

 

Why Natural Gas ETFs?

 

Natural gas accounts for almost 25% of US energy consumption. With the ever increasing world demand for energy, aggregated by the curbs on nuclear energy, the prospects of the natural gas industry have improved. The US Energy Information Association projected growth of nearly 64% between 2004 and 2030. This made natural gas financial products more popular among traders.

 

The most important factor determining the price of natural gas ETFs is the price of natural gas, which in turn is influenced by the demand and supply conditions. The biggest market for natural gas is North America. Trade and prices are finalized through auctions in the natural gas market. When demand is higher than supply, the buyer has to pay a higher premium to capture the supply. When demand is lower than supply, the buyer may choose to wait for prices to decline. Demand for natural gas comes from residential consumers as well as the agricultural, manufacturing and transportation industries. Thus, demand is linked to economic activity as well as weather conditions.

 

Advantages of Natural Gas ETFs

 

With the spiraling consumption of natural gas, investing in natural gas ETFs has become more attractive. Investments can be made into ETFs that focus on research oriented companies or firms that produce and distribute natural gas. Many big companies have revamped their natural gas production facilities, offering great opportunities for investors.

 

The demand for natural gas ETFs is also propelled by the increasing trend towards green investments.

 

Disadvantages of Natural Gas ETFs

  • Natural gas ETFs are extremely volatile.

  • There is low liquidity. If a big player pulls out of the market, recovery would be very slow.

 


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