Ultimate Guide to Natural Gas Futures, Part 1

NEW YORK (TheStreet) -- Investors who want to invest in natural gas futures have two choices in the U.S. market: United States Natural Gas (UNG) and the iPath Dow Jones-UBS Natural Gas Total Return Subindex ETN(GAZ).

UNG and GAZ offer investors exposure to natural gas futures contracts. Unlike the precious metals, these funds do not store gas, and that has been a sore spot for investors in 2009. Futures contracts cannot be bought and held; they must be "rolled" each time the contract expires.

UNG uses a monthly roll strategy whereby it buys the near month contract and then rolls to the next contract before expiration. Investors can go to the Web site of the United States Natural Gas fund and find the roll dates under the "Fund Facts."

GAZ is a note that tracks the Dow Jones-UBS Natural Gas Total Return Sub Index. It uses a similar strategy to UNG, but instead of rolling monthly, it rolls bi-monthly. Since GAZ is an ETN, it doesn't list what contracts it owns, if any. Barclays stands behind the notes and is responsible to make payments on the contracts, and a purchaser of GAZ is lending Barclays money the same as other bond holders. Barclays is not restricted in how it can use the capital and investors face the same risk as other holders of Barclays debt.

One important difference between UNG and GAZ, besides the credit risk in GAZ, is the tax implications. UNG is a partnership that pays no Federal taxes itself. Gains or losses are passed through to shareholders. Investors receive a Schedule K-1 and may have tax credits or liabilities even if they receive no income payments. GAZ is similar to other stocks in that income payments would be reported on a Form 1099 and capital gains and losses are incurred at the sale. Neither UNG nor GAZ has paid dividends.

Head to Head

In terms of strategy, the funds almost perfectly tracked each other from inception until August of this year (they separated for reasons discussed below), suggesting no clear advantage for one over the other.