ETF Talk: Natural Gas Offers Potential Fuel for Profits

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Today, we continue our series of energy-sector ETF Talks with a natural gas-focused fund. Used for power generation, heating homes and other domestic applications, as well as fuel for vehicles engineered to run on it, natural gas is generally regarded as a cleaner alternative to gasoline and other oil-based energy sources. As energy demand continues to increase worldwide, natural gas usage should rise. An exchange-traded fund (ETF) poised to capitalize on this increased usage is the First Trust ISE-Revere Natural Gas Index (FCG).

This non-diversified fund seeks results which, before fees and expenses, correspond generally to the performance of an equal-weighted index consisting of exchange-listed companies that derive a substantial portion of their revenue from exploration and production of natural gas.

While FCG had a rough year in 2012, decreasing about 15%, it closed trading last week slightly ahead for 2013. The fund also offers a yield of 0.4%. If these numbers seem low, they are. However, this modest performance just means the natural gas market is poised to make a strong comeback, and FCG should ride that ascent towards increased profits.

Roughly 96% of FCG’s holdings are in the energy sector, with the remainder invested in the utilities sector. Its top 10 holdings comprise 39.11% of the fund’s assets, and only the top four individual positions held make up more than 4% of FCG’s total assets. The top five companies held are: Goodrich Petroleum Corporation (GDP), 4.16%; SM Energy Company (SM), 4.14%; Chesapeake Energy Corporation (CHK), 4.12%; Questar Corporation (STR), 4.02%; and Newfield Exploration Company (NFX), 3.87%.

With increased use of natural gas sure to factor into the solution for the growing global demand for energy, expect FCG to recover. In light of its status as a cleaner fuel than gasoline, more stringent environmental regulations likely will be passed in the future, and that will almost certainly benefit natural gas. Indeed, it is best to look at FCG’s current low numbers as an excellent opportunity to invest in a sector poised for long-term growth.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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