Top Natural Gas ETFs in Canada 2024

Natural gas has been under scrutiny recently owing to its important role in the transition to clean energy. Deloitte expects an increase in natural gas infrastructure investments throughout 2023 to reduce its carbon and methane emissions, which could give the resource further tailwinds.¹

Similarly, McKinsey expects natural gas, especially liquified natural gas (LNG), to experience stronger growth as domestic supply lags international demand. The firm expects demand to grow by 3.5% per year to 2035, with around 100 million metric tonnes of added LNG capacity required to meet demand growth and need from existing projects.²

Therefore, natural gas can play two roles as an investment: for speculation on prices and long-term trends, or as an inflation hedge for when energy prices skyrocket. To gain access to natural gas, investors can use exchange-traded funds (ETFs) that directly invest in securities that provide exposure to natural gas prices.

Here’s all you need to know about natural gas ETFs in Canada.

What is a natural gas ETF?

A natural gas ETF is an open-ended fund that holds a portfolio, or “basket” of securities that track natural gas prices. Unlike physical commodity ETFs like gold that can store bullion, natural gas ETFs can’t store physical natural gas due to cost and space constraints.

Instead, these ETFs hold derivatives called futures contracts, which in this case are agreements to buy or sell natural gas at a certain price at a certain time. By holding futures contracts, these natural gas ETFs gain synthetic exposure to natural gas.

Like all ETFs, shares of natural gas ETFs trade on exchanges under their own ticker and charge a percentage fee called a management expense ratio, or MER.

Top Canadian Natural gas ETFs

The following ETFs provide exposure to natural gas via futures contracts. Because the Canadian ETF market is smaller, some of the picks here are U.S.-listed ETFs. To buy these ETFs, Canadian investors will need to convert to U.S. dollars.

Horizons Natural Gas ETF

For Canadian investors not looking to convert currency, HUN provides the most straightforward way of investing in natural gas. The ETF tracks the Solactive Natural Gas Winter MD Rolling Futures Index ER, which holds a portfolio of natural gas contracts.

BetaPro Natural Gas Leveraged Daily Bull ETF

Advanced investors looking to trade natural gas prices with leveraged exposure can consider HNU. This ETF is essentially the leveraged version of HUN. It provides 2x daily exposure to the Horizons Natural Gas Rolling Futures Index. As noted earlier, this ETF is highly volatile and not suitable for holding periods longer than a day.

United States Natural Gas Fund

If you’re investing in U.S. dollars, UNG could be a possible alternative. This fund tracks the price of natural gas delivered at the Henry Hub, Louisiana by trading natural gas futures contracts on the NYMEX, and is collateralized with cash and U.S. government bonds.

ProShares Ultra Bloomberg Natural Gas

Investors looking for a leveraged natural gas ETF traded in U.S. dollars can opt for BOIL. This ETF provides daily 2x leveraged exposure to the Bloomberg Natural Gas Subindex. As with all leveraged ETFs, holding BOIL longer than a day can result in unpredictable returns due to compounding.

What to know before investing in natural gas ETFs

Investors who buy natural gas ETFs need to be aware of a phenomenon called “contango,” which occurs in many commodity futures markets. Contango occurs when the futures contract price for a commodity, like natural gas, is higher than the current or “spot” price. In simple terms, contango happens when investors expect the price of a commodity to increase over time.

As a result, the futures contracts will cost more than the present-day spot price of the commodity. When the ETF needs to roll over its contracts (sell expiring contracts and buy new ones), it will have to pay a higher price for the new contracts. Therefore, contango can erode the value of a natural gas ETF over time as the ETF is effectively buying high and selling low.³

Finally, some commodities ETFs can provide leveraged exposure to natural gas futures indexes. For example, if the index of these leveraged natural gas ETFs goes up by 1% in a day, the leveraged ETF will return 2%. And vice-versa, the leveraged natural gas ETF will fall by 2% if the index falls by 1%. The leverage target of these ETFs is only intended to be accurate for a single day.

Thus, leveraged natural gas ETFs should not be held long term. In general, they’re considered to be advanced tactical day or swing-trading tools. They’re generally not suitable for beginner investors and can behave unpredictably if held longer than a single trading day, as leveraged gains and losses can compound, especially during volatile markets.

Pros of investing in natural gas ETFs

Here are some of the advantages of investing in natural gas ETFs:

• Inflation hedge: Like most commodities, natural gas ETFs tends to perform well during inflationary periods like 2022.
• Diversification: Natural gas ETFs can provide diversification to a portfolio of stocks and bonds thanks to its lower correlation.
• Accessibility: Natural gas ETFs are much easier for retail investors to buy and sell compared to individual natural gas futures contracts.

Cons of investing in natural gas ETFs

Some reasons to avoid natural gas ETFs include:

• High volatility: Natural gas prices tend to be very volatile, and natural gas ETFs holding natural gas futures can be as well.
• Expensive: Natural gas ETFs tend to charge very high MERs due to their use of futures contracts.
• Tracking error: Due to contango, natural gas ETFs holding futures can produce returns differing from the actual spot price of natural gas.

Are natural gas ETFs right for you?

Many unsuspecting investors have been burned by the high volatility, fees, and contango that many natural gas ETFs possess. For beginner investors, these investments may be unsuitable. They can be highly volatile and behave in unpredictable ways.

If you’re looking to speculate on natural gas prices over the short-term, then a natural gas ETF could be a way to gain exposure. If you need enhanced exposure, a leveraged natural gas ETF could be an alternative to using margin.

In any case, it’s important to critically assess your investment objectives and risk tolerance before determining whether or not a natural gas ETF is a suitable holding. Alternatively, investors can consider Canadian oil & gas ETFs or specific natural gas stocks.