The regulatory uncertainty facing the United States Natural Gas ETF ( UNG) continues to present a compelling reason why investors looking to gain exposure to natural gas should choose the First Trust ISE-Revere Natural Gas Index Fund ( FCG) instead. For more information on this subject, check on my article on "A Natural-Gas ETF With Fewer Headaches" in RealMoney.com. For the month ending July 17, FCG rose 0.12% while UNG fell 12.60%. More recently, UNG rose 10.14% for the week ending July 17 while FCG rose 12.57%. FCG tracks a basket of exchange-listed companies that derive a substantial portion of their revenues from the exploration and production of natural gas. FCG ranks natural gas companies according to P/E ratio, Price/Book ratio, Return on Equity and the correlation to gas futures prices. The fund's methodology is also designed to ward off illiquid companies with market caps that do not meet the standard. UNG is a complex, non-traditional ETF that is designed for sophisticated investors. There are three compelling reasons why "regular" investors should consider FCG instead of UNG: Structure: UNG tracks a basket of natural gas futures contracts and swaps. Each month current underlying futures expire and the fund must "roll" the contracts into the next month. This process can cause the fund to deviate from its net asset value (NAV). See my earlier article on "Nat-Gas ETFs and Contango" FCG, on the other hand, is a traditional ETF that tracks a basket of stocks. FCG can be easily hedged, and is more likely to reflect what it's worth. See my article on "Hedging Your ETF Bets."
Current Regulatory Problems: UNG issuers were forced to stop creating new shares of the ETF on July 7 when the fund had reached its regulatory limit. Since then, UNG has been stuck in ETF purgatory as the fund awaits approval from the SEC. The halt of the creation/redemption process jars the fund away from its underlying value while breaking one of the fundamental promises of ETFs. See my article, "Natural Gas ETF Clock Ticking." FCG, which has a different, more traditional, design, is not registered in the same manner as UNG. Future Regulatory Problems: Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission has announced that the regulatory group will hold a hearing to discuss possible position limits on commodities. The CFTC is currently concerned that commodity prices are overly influenced by speculators. Any changes in these regulations could affect UNG's shareholders. FCG shareholders do not have to worry about the upcoming regulatory hearings.