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Don Dion's Weekly ETF Blog Wrap

Here is some of what Don Dion blogged about on RealMoney this past week.

Picking a Natural-Gas Play

Posted 12/11/2009 1:52 p.m. EST The future for natural-gas prices remains bearish in my view, but there's no denying the fuel's recent rally, or the short-term investment opportunities for those of a more bullish mindset.

If natural-gas prices stay strong, the newer U.S. 12 Month Natural Gas Fund (UNL) is a better bet than the U.S. Natural Gas Fund (UNG). But if you want to hedge your bets, the First Trust ISE-Revere Natural Gas Fund (FCG), which has tracked oil equipment and exploration ETFs more closely than the price of natural gas, would likely benefit if both oil and natural-gas prices increase.

In the past month, while the U.S. Oil Fund (USO) fell 11.6%, UNG gained 5.6%. The divergence was most dramatic today with crude prices briefly dipping below $70 per barrel, as natural-gas prices jumped 7%. UNG previously outperformed USO for brief periods this year, but the general trend has been one of consistent underperformance, as UNG fell to one new low another.

The recent rise in natural-gas prices is largely thanks to early winter weather in parts of the U.S., which caused inventory to dip for the first time in nine months. While some may see this as strong evidence of a resurgence for natural gas and UNG, the supply/demand imbalance continues to make me cautious. In any case, UNL has outperformed UNG throughout the rally and will likely continue to do so if the jump continues.

Where winter heating costs are concerned, oil prices may benefit as much as natural gas, a scenario that would make FCG the best play. I have often promoted FCG as an alternative to the damaged UNG, but rather than following the recent natural-gas rally, FCG appears to be mimicking the performance of oil and oil explorer funds, with UNG price movements nudging it up or down within that group. In this scenario, FCG will outperform the other instruments it has been trending with, including the iShares Dow Jones U.S. Oil Equipment Fund (IEZ), due to its stronger exposure to natural gas.

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