Ultimate Guide to Natural Gas: Stock Funds

NEW YORK (TheStreet) -- Last week I covered the domestically listed futures ETFs, United States Natural Gas (UNG Quote) and iPath Natural Gas (GAZ Quote). This week I'll take a look at the stock funds.

There's a mutual fund and an ETF for natural gas: Fidelity Select Natural Gas (FSNGX Quote) and First Trust ISE-Revere Natural Gas (FCG Quote). FSNGX invests at least 80% of assets in companies involved in production, transmission, distribution and exploration of natural gas, along with companies that provide equipment and services to the aforementioned. FCG invests in companies engaged in the exploration and production of natural gas.

Aside from those mandates, the funds offer a difference in passive vs. active management. FCG ranks companies based on four measures: price/earnings; price/book; return on equity; and the correlation to gas futures prices. It takes into consideration market capitalization and liquidity, ranks the funds, and puts the top 30 into the index. It rebalances quarterly.

FSNGX changes its strategy with the times. Right now, manager James McElligott "has been concentrating on firms with improving cost structures that are focused on growth," according to Morningstar analyst Jonathan Rahbar, who cites the large holding in Chesapeake Energy (CHK Quote) as part of this strategy. As of July 31, FSNGX held 8.8% of assets in CHK, along with 2.8% in Chesapeake convertibles. (See Cramer's take.)

With fewer restrictions, FSNGX can overweight portfolio positions and move outside of its mandate with a portion of assets. While its No. 1 holding CHK is 8.8% of assets, the top holding in FCG is Stone Energy (SGY Quote), at 5.5% of assets on Sept. 14. A single stock could grow to dominate FCG, but only for three months at most, due to rebalancing.