Why the urgency? The ETF is trading at a 13% premium to its net-asset value now that new-share creation has been halted. This makes the UNG a closed-end fund, meaning new investors can only buy in through present shareholders, and not the fund manager. With regulators tightening the screws on futures-based commodities funds, that premium could vanish – quickly, Cramer said – hurting anyone who owns the UNG.
That’s what happened to Deutsche Bank’s DXO, a double-long oil ETF that stopped new-share creation and also was trading at a premium to its net-asset value. The feds singled out the DXO, forcing DB to shutter the fund and thereby eliminating the premium. The Commodity Futures Trading Commission could do much the same to the UNG.
The nat-gas ETF has other problems as well, namely the way it tries to make money. The UNG doesn’t in fact own natural gas. Instead it trades near-month futures contracts. At the end of each month the fund rolls over its present contracts for those of the next month. The problem? A lot of money is lost in these rollovers if natural-gas prices are rising from month to month. For example, nat-gas spot prices increased 1% during the summer of 2007, but the UNG lost 12% because of its practice of rolling over contracts.
Cramer has been a big proponent of natural gas, calling it the best possible bridge fuel to wean the US off crude oil. The US is sitting on 238 trillion cubic feet of proven nat gas reserves, and there’s another 1.8 quadrillion cubic feet of probable, possible and speculative reserves. Plus, natural gas is much more carbon friendly. Washington, it seems, is finally catching on, and that could mean good things overall for the industry. But the UNG is not the way to play it.
Natural gas prices are down 26% over the last three months, while the UNG has declined 28%. Since the market’s March 6 lows, nat gas has dropped 30% compared with the UNG’s loss of nearly 38%. That’s why Cramer said investors are better off buying XTO Energy , Devon Energy , Anadarko Petroleum , Apache or Linn Energy , for its monster 11.6% dividend yield.
People who feel they must find an ETF play should buy a stock-based fund, Cramer said, First Trust’s ISE-Revere Natural Gas. The FCG is up 5% over the past three months and 81% since March 6, as natural-gas stocks have pushed higher despite the commodity’s falling price.
Cramer’s bottom line? Avoid the United States Natural Gas Fund, or sell it if you own it. Use the ETF’s big move on Thursday, as a result of nat-gas prices jumping 19%, to take profits.
“I think it’s a huge mistake,” Cramer said of the UNG. “The whole thing shouldn’t exist.”
Cramer’s charitable trust owns Devon Energy.
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