The UNG to Dip on Warm Forecast

More bad news for the U.S. Natural Gas ETF (UNG - commentary - Trade Now): A warm forecast will likely depress natural gas futures heading into December, and ETF investors looking for exposure to the physical commodity through the UNG should be prepared for further contraction.

In the most recent one-month period ending Nov. 19, the UNG has continued its free-fall, sliding over 23%. With holding tanks still brimming with the fuel, supply issues continue to choke prices. This week, the National Weather Service (NWS) released its forecast for the end of November, calling for above-average temperatures for a large portion of the U.S., which will serve to dampen natural gas prices further as demand falls and inventories continue to set records.

The agency's longer-term forecast was not better. In December, the NWS called for above-normal temperatures for the U.S. Midwest, Great Lakes and Western regions. This outlook is expected to continue through January and February.

While the short-term outlook is grim for the investors holding the physical commodity, it is still possible to profit from the natural gas sector. Although demand for heating fuel going into the start of winter will likely remain tepid, analysts predict that companies will continue to add to the swelling stockpiles.

I advise investors looking for natural gas exposure to stick to ETFs that track the firms responsible for the production, storage and transportation. Natural gas producers ETFs such as the First Trust ISE-Revere Natural Gas Fund (FCG - commentary - Trade Now) and the JPMorgan Alerian MLP Index ETN (AMJ - commentary - Trade Now) may provide more stable returns amidst the less-than-ideal environment.

The UNG has consistently proved itself to be a flawed product, and I advise investors to steer clear at all costs. Investors who feel a burning desire to hold a natural gas futures-backed ETF can reduce their losses with the U.S. 12-Month Natural Gas (UNL - commentary - Trade Now). This instrument will prove less disruptive to the market and avoid many of the contango issues that marred the veteran fund.

At the time of publication, Dion was long the AMJ.

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At the time of publication, Dion was long the AMJ.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.