Natural Gas ETF Shakes Up Portfolio

NEW YORK (TheStreet) -- First Trust ISE-Revere Natural Gas(FCG) shook up its portfolio in the latest rebalancing, but it remains well positioned in the natural gas industry.

The growth and evolution of the ETF industry is a story of investor demand. In the past, investors have been satisfied having access to products that have the ability to mimic the performance of benchmark indexes, but many are increasingly seeking out funds that try to beat the performance of their benchmarks. In order to meet this demand, a number of top providers have taken to launching active and pseudo-active ETF products.

Unlike traditional, passive ETFs which employ market-cap weighted indexing strategies, pseudo-active ETFs determine individual holdings based on a collection of criteria or a formula.

One popular of the more popular ETFs which makes use of an alterative indexing strategy is FCG.

In the past I have looked to this fund as an adequate proxy for playing the popular natural gas arena. Rather than using the United States Natural Gas Fund(UNG) , a futures backed product plagued contango and targeted by regulators, FCG tracks a basket of companies dedicated to the exploration and production of this fuel.

FCG is designed to track the ISE-Revere Natural Gas Index. Unlike a market cap weighted index, this basket of companies is equal weighted. According to the First Trust website, constituents chosen for the index are determined based on a number of metrics including price/earnings ratio, price/book ratio, return on equity and correlation to natural gas future prices. In the end, a total of 30 companies are chosen to represent the index.

FCG's make-up is not permanent. Each quarter, First Trust evaluates the natural gas industry based on the stated criteria and makes any needed changes. While some of these are minor tweaks, as shown by the fund's current state, dramatic changes can and do occur.

Comparing the fund's current index to that of May 31, 2010 (a month after and a month before the rebalancing), one can see a number of significant alterations.

Before the rebalancing, FCG's top five holdings included firms such as Mariner Energy(ME), Pioneer Natural Resources(PXD), Cimarex Energy(XEC) EOG, and Questar(STR).