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Why UNG Is Worst Investment in the World: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- The worst investment in the world, the United States Natural Gas fund (UNG) has again revealed how cruddy it is by announcing a four-for-one reverse split as of Feb. 22. Anyone who still holds this turkey expecting it to even approximate the price movement of natural gas should be convinced by this last move to get out of this horrible fund.

Futures-based ETFs start with a grave disadvantage in the ETF world: instead of using various groupings of stocks to replicate the movement in a sector, they must use futures contracts and over-the-counter swaps to try and capture the price movement of an underlying commodity. While there may be a terrific appetite for investors afraid or unwilling to engage in the futures market to bet on prices of natural gas or crude oil, there is really no good way to represent these commodities like stocks. Most of these ETFs are programmed to fail.

UNG suffers from a further problem. With natural gas dropping for most of the last four years, an increasing skew of the price curve, called a contango, has gotten more and more extreme. Futures contracts are monthly instruments and UNG is forced to move their exposure every 30 days to the next monthly contract, a process known as a "forward roll." With a skewed price curve, the fund is literally forced to pay a deep premium to roll their contracts, inevitably dropping the value of the fund intrinsically every month.

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You can see the effects of the fund takeout combined with the deep roll premium inflicted by the natural gas contango curve: The fund is down more than 50% in the last 12 months and down a stunning 96% since its highs were reached in the summer of 2008.

Such a stunning loss would drive most other funds out of business, but the deep appetite of investors looking for natural gas exposure in "stock" form is seemingly endless. As UNG drops close to the $5 threshold considered important for listed securities, it will artificially pump up the relative price of shares by doing a four for one reverse split, the second time in a year that the fund has resorted to a reverse split to stay in business.

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