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No Winter Cheer For Natural Gas ETFs?

Broad commodities have gone off the deep end on sluggish trends with the energy market rout deserving a special mention. Among the issues wrecking havoc on the energy market, rising supplies and falling demand on global growth worries are primary. In such a situation, the Saudi-led OPEC’s decision of not cutting production and even scrapping the regular production limit to save their market share sent oil and other energy-based commodities into a tailspin. In such a scenario, the only hope for the natural gas market was the Arctic Chills, which gives a fresh lease of life to this commodity every winter. The cold snap boosts electricity demand across the region putting natural gas in focus. In fact, in 2014, the Polar Vortex caused natural gas prices to jump over 50%. As almost 50% of Americans use natural gas for heating purposes, withdrawals in natural gas supplies push up the commodity’s prices. The latest weekly inventory release from the U.S. Energy Department also gives the same cues. Natural gas supplies have seen a bigger than expected decline following the season’s first withdrawal. Stockpiles fell by 53 billion cubic feet (Bcf) for the week ended Nov 27, 2015, higher than the guided range (of a 46-50 Bcf draw). The decrease was also higher than both last year’s drop of 42 Bcf and the 5-year (2010-2014) average decline of 48 Bcf. Still, broad-based energy market worries and the possibility of a warmer weather this winter (due to El Nino) did not let natural gas prices enjoy the drawdown in supplies. Oil lost about 10% since the OPEC meeting. Plus, predictions that warmer weather might go into late December – key heating period also dampened investor mood. Energy commodities have now slipped to a more than six-year low. In fact, January 2016 might not imitate the previous two comparable same months due to a protracted and stronger El Nino, which causes weather disruptions in many regions around the world. The effect of El Nino includes drought in some regions and flooding in others due to abnormal warming of the Pacific Ocean. As per Weather Services International, El Niño is expected to cause below-normal temperatures across the southern Plains and into the Southwest, while above-normal temperatures will likely prevail in the eastern and northern parts of the U.S. This weather pattern would result in lower heating demand in the northern hemisphere this winter. WSI also predicted gas-weighted heating degree days to tally about 3,600, suggesting 10% less demand than the year-ago winter. ETF Impact As a result, an ETF tracking the natural gas futures – T he United States Natural Gas ETF (NYSEARCA: UNG ) – has lost about 45% so far this year and was off 16.4% in the last one month (as of December 8, 2015). So investors can avoid these natural gas ETFs in the near term (see all Energy ETFs here). UNG in Focus Investors seeking direct exposure to natural gas, a key fuel source for power plants, may find UNG an attractive option. It is the most popular ETF, having amassed about $478 million in assets. The product looks to track the changes in percentage terms of the price of natural gas futures contracts that are traded on NYMEX. The fund takes positions in the near month futures contracts on expiry and rolls over to the next month futures contracts. As the prices of the next month futures contracts exceed that of the near month futures contracts (also called “contango”), the fund loses on rolling. Hence, UNG is vulnerable to the prolonged period of contango. At present, the fund holds two contracts namely NYMEX Natural Gas NG Jan16 and ICE Natural Gas LD1 H Jan16. The fund charges 60 bps in fees. iPath Dow Jones-UBS Natural Gas ETN (NYSEARCA: GAZ ) This is an ETN option for natural gas investors. It delivers returns through an unleveraged investment in the natural gas futures contract plus the rate of interest on specified T-Bills. The product follows the Dow Jones-UBS Natural Gas Total Return Sub-Index. The note is less popular with AUM of $4.4 million. It is a high cost choice, charging 75 bps in annual fees. GAZ is down 77% in the year-to-date frame and lost about 33% in the last one month (As of December 8, 2015). United States 12-Month Natural Gas ETF (NYSEARCA: UNL ) This product seeks to spread out exposure across the futures curve in order to mitigate contango, a huge problem in the natural gas ETF market. It is done by tracking the average of the prices of 12 contracts on natural gas traded on the NYMEX, including the near month to expire (except when the near month is within two weeks of expiration) and the contracts for the following 11 months, for a total of 12 consecutive contracts. It has amassed just $12.6 million in its asset base and charges 75 bps in fees per year from investors. UNL is down 32.4% so far this year and was off 8.7% in the last one month. Original Post

All The Time, Every Time

Most investors, especially those at or near retirement, would give a limb or two for consistent returns. They wouldn’t even have to be staggering, Bernie Madoff 12% consistent returns. 4-5% real returns year in and year out is a pension trustee’s dream. Of course, it’s not surprising then that so many investment products and strategies promise this, or something that smells enough like it to pass muster. Some of these have become quite popular in recent years as investors are still trying to avoid another 2008-2009 bear market but keep stock-like returns (or at least something better than a 2.2% Treasury yield). Some risk parity or “all-weather” strategies have gained notoriety, including a spin on Ray Dalio’s All-Weather retail strategy highlighted in Tony Robbins’ recent book (which I covered in some detail here ). So just how all-weather has said strategy been of late? I ran a historical simulation with publicly available products to fill in the allocations as follows: 40% long-term Treasury bonds (NYSEARCA: TLT ) 30% US stocks (NYSEARCA: VTI ) 15% intermediate bonds (NYSEARCA: BND ) 7.5% commodities (NYSEARCA: GSG ) 7.5% gold (NYSEARCA: GLD ) Now, as I’ve pointed out before, this portfolio allocation is bond heavy and duration heavy. When long-term bonds hold up, this portfolio will too. When they don’t, it’s going to be tough going. Year to date through 11/30/2015, this allocation is down -2.30% despite long-term bonds (TLT) having an impressive gain of 9.07% over the same period. Commodities have been crushed (-42.35%) and gold is down (-8.79%), wiping out gains elsewhere. It’s not like I’m sitting here saying -2.30% is terrible. The Vanguard Balanced Index Fund (MUTF: VBINX ) is only up 1.80% over the same period (YTD through 11/30/2015). But the “All Weather” portfolio doesn’t come with any guarantees. The worst 12-month period in my simulation (4/2007-11/2015) had a double-digit loss like most other strategies (-15.26 through 2/2009). And we honestly haven’t seen an environment with rising rates to really test this out. The returns from long-term bonds (TLT) over this period drove more than 100% of the return of this “All Weather” strategy over the test period. That’s right, diversifying away from long-term bonds hurt you (How many people made that bet when the Fed took the Fed Funds rate to zero?). If you think that long-term returns from high-duration bonds are going to be 7-8% from here, you might have a surprise coming. With an average duration of 14.30 in this portfolio, there’s no escaping the impact of higher long-term rates on performance, if and when they come. My real point here isn’t to pick on the All-Weather portfolio per se. It’s to help us all understand that no strategy is ideal. Nothing is going to work all the time, every time. “All Weather” is a misnomer. It’s not totally unreasonable to think there is a period of time when rates can go up (long bonds go down) and stocks are flat or down. Or when rates are up enough to offset any potential gains from stocks. Or a year like 2015 when losses in commodities are sufficient to take out healthy gains from the long-term bonds. Despite our best attempts, investing involves risk. We can mitigate that through portfolio diversification, but there is no eliminating inconsistent short-term returns. Some years are going to be better, and some will be worse. I don’t know which will be the case for your portfolio next year, but if you aren’t prepared for that, you’re going to find yourself making some nasty mistakes.

From Overbought To Neutral: U.S. Index And Style ETFs

After two days of declines to start the week, just one of the U.S. equity index and style ETFs that we track in our daily ETF Trends report remains in overbought territory. One week ago, only one ETF was NOT overbought. You can see the “mean reversion” trade that has occurred in our trading range screen below. If you’ve never seen this screen from Bespoke before, please refer to the “Trading Range” description at the very bottom of this post. (click to enlarge)