Natural Gas ETFs: Two Directions

NEW YORK (TheStreet) -- Year to date, shares of the United States Natural Gas ETF (UNG) have fallen more than 50%, while shares of First Trust ISE-Revere Natural Gas (FCG) have jumped more than 58%. The important difference in performance between these two funds can be credited to structure and the ongoing drama unfolding in the futures markets.

The affect of futures markets regulation on funds like UNG has yet to be fully realized, but early indications show that there will be a profound impact on futures-based funds. As the Commodities Futures Trading Commission seeks to dampen the impact that exchange-traded products have on the commodities they track, a wave of mercy killings, restructurings and halts in share creation is likely to continue.

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Drama isn't good in the world of passively indexed products. Most ETFs are launched with an objective and a means of execution. In the case of futures-based products like UNG, it is to track the price of oil synthetically through natural gas futures contracts. FCG, on the other hand, tracks natural gas companies through a basket of equities.

Natural gas isn't the only place where this occurs. Investors looking to gain exposure to agriculture can choose PowerShares DB Agriculture (DBA) or Market Vectors Agribusiness ETF (MOO). DBA tracks the futures contracts of commodities like corn, wheat sugar and soybeans. MOO, on the other hand, tracks agriculture companies like Syngenta (SYT) and Monsanto (MON). Year to date, MOO is up 45% while DBA is down 0.34%.

Historically, the argument made for futures-based commodity funds like UNG and MOO has been that baskets of futures are more of a "pure play" on commodity prices than baskets of equities. While the spot prices of commodities impact both futures markets and companies that deal with the commodities, the connection is stronger when you look at the futures markets.