Natural Gas: How Are Futures And ETFs Correlated?

Buckle up, time for a ride to the energy ETFs’ world. If you've ever wondered how to trade the energy markets – read on, you are in the right place!

Correlation Analysis

For the sake of this study, we will take the Henry Hub Natural Gas (NG) futures contract as a parameter and draw the correlations on each ETF chart to better visualize their relationship.

  • United States Natural Gas Fund LP (UNG):

    This fund offers exposure to one of America’s most important commodities, natural gas, and potentially has appeal as an inflation hedge. While natural gas may be appealing, UNG often suffers from severe contango making the product more appropriate for short-term traders.” (ETFdb.com)

    As you can see on the chart below, the correlation coefficient remains 1 all the time, which is an indication of a perfectly correlated asset to the Henry Hub Natural Gas futures.
    To read more about Contango versus Backwardation, I suggest checking these out:
  • o   “Trading the Curve in Energies” (CME Group);

    o   “What is Contango and Backwardation” (CME Group).

  • ProShares UltraShort Bloomberg Natural Gas (KOLD):

    “This ETF offers 2x daily inverse leveraged exposure to natural gas, an asset class that is capable of delivering big swings in price over a relatively short period of time. Combining this volatility with explicit leverage results in a fund that has the potential to churn out big gains or losses, meaning that KOLD is really only appropriate for sophisticated, active investors.” (ETFdb.com)

    This instrument is particularly useful when you want to short-sell natural gas with leverage of 2:1. So, buying it (w/ a long position) is equivalent to short/selling the underlying asset. As you can see on the chart below, the correlation this time is perfectly inverted (or negative).

  • ProShares Ultra Bloomberg Natural Gas (BOIL):

    “This ETF offers 2x daily leveraged exposure to natural gas, an asset class that is capable of delivering big swings in price over a relatively short period of time. Combining this volatility with explicit leverage results in a fund that has the potential to churn out big gains or losses, meaning that BOIL is really only appropriate for sophisticated, active investors.” (ETFdb.com)

    This instrument is very similar to the first one — the only difference is, you can buy natural gas with leverage of 2:1.
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Disclaimer: All essays, research and information found in this article represent the analyses and opinions of Sunshine Profits' associates only. As such, it may prove wrong and be ...

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