Sunday, September 20, 2009

Natural Gas ETF's from Canada - High Volume Trading

By Asjylyn Loder

Sept. 18 (Bloomberg) -- Two Canadian exchange-traded funds that aim to return double the performance of natural gas, both up and down, have reached record volumes as traders try to profit from the fuel’s volatility.

Volume in the Horizons BetaPro Nymex Natural Gas Bull Plus ETF reached a high on Sept. 16 of 23.6 million shares, and the Horizons BetaPro Nymex Natural Gas Bear Plus ETF set a record yesterday of 16.9 million shares traded.

“Investors could be looking to make up lost ground from the recession, which adds to the appeal of leveraged and inverse funds,” said Tom Lydon, president and chief executive officer at Global Trends Investments in Newport Beach, California. “Investors could be feeling confident about the direction of natural gas and feel secure in ‘doubling down.’”

Volatility in the natural gas market has reached its highest point since September 2006, when hedge fund Amaranth Advisors LLC collapsed because of losses on its natural gas bets.

The volatility has attracted investors hoping to amplify their returns through the leveraged funds, said Adam Felesky, chief executive officer of Toronto-based BetaPro Management Inc., which manages the two Canadian ETFs.

“The increased volatility we’ve seen in natural gas has presented huge potential returns, or losses I guess, for individuals who want that exposure,” Felesky said.

The Bull ETF tries to deliver double the return of the near-month natural gas contract on the New York Mercantile Exchange. The Bear fund seeks daily results that are two times the inverse of the future, rising when gas falls.

Gas Decline

Natural gas on the Nymex has fallen 33 percent this year, while the Bull fund has dropped 85 percent and the Bear fund has risen 78 percent. The funds rebalance daily, compounding their tracking error over time.

Natural gas rose 32 cents, or 9.3 percent, to $3.778 per million British thermal units today on the Nymex.

The C$998 million ($933 million) Bull fund traded 17.2 million shares today, rising 90 Canadian cents, or 6.3 percent, to C$15.12. The Bear fund fell 45 Canadian cents, or 7.2 percent, to C$5.80, with 16.5 million shares changing hands.

The 20-month-old funds have been growing in popularity since early July, when the U.S. Natural Gas Fund, traded under the ticker UNG, ran out of new shares. The Alameda, California- based fund is largest ETF in the fuel.

UNG, which ran out of new shares on July 7, began trading at a premium to its underlying natural gas assets. The premium grew after the fund said on Aug. 12 that it couldn’t issue 1 billion new shares approved by the Securities and Exchange Commission because of tightening position limits on energy speculation.

Alternative Fund

Investors turned to the iPath Dow Jones-UBS Natural Gas Total Return Sub-Index exchange-traded note until Barclays Bank PLC stopped issuing new notes on Aug. 21 because of the tighter position limits from the Commodity Futures Trading Commission. The notes also began trading at a premium.

“People likely started looking for alternatives to UNG,” said Scott Becker, an equity derivatives strategies at Jefferies Group Inc. in New York. The Canadian double-long fund provides “cheap leverage” and “probably benefited from the alternatives trading at a premium,” he said.

The 15-day average volume in the Bull fund more than tripled since the start of July to 16.2 million shares a day, up from an average of 4.94 million shares a day from the launch of the fund in January 2008 through the end of June. Average volume in the Bear fund more than doubled in that time to 9.65 million shares a day from 3.72 million.

Rapid Turnover

Shares in both funds turn over quickly, indicating that most investors are making short-term bets, Felesky said. The implied turnover of the Bull fund is every three days, while shares at the Bear fund are turning over daily, he said.

“Investors should make sure they understand leveraged ETFs, though,” Lydon said in an e-mail yesterday. “Don’t get into them if you don’t know how they work or you could get burned.”

The Financial Industry Regulatory Authority, the largest independent regulator for securities firms in the U.S., and the SEC issued a joint statement in August highlighting the risks leveraged and inverse products posed, including performance that can be unpredictable because of daily compounding.

Leveraged and inverse ETFs are extremely volatile and not well suited to buy-and-hold investors who don’t want to regularly rebalance their investment, said Bradley Kay, an ETF analyst with Morningstar Inc. in Chicago, in an interview yesterday.

“How much risk have you already taken on jumping into a commodity market that’s already volatile?” Kay said. “And you want to throw leverage on top of that? It’s a bit of a recipe for disaster if you’re looking for predictability in your portfolio.”

To contact the reporter on this story: Asjylyn Loder in New York
Last Updated: September 18, 2009 16:48 EDT

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