Natural Gas Index Fund

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DTalos
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Natural Gas Index Fund

Post by DTalos »

What are some established, diversified natural gas index funds? By diversified, I mean funds that have a a mix of exploration, pipeline and end use (utilities) companies of natural gas. Since there is no way to know which component of natural gas (exploration, pipeline, end use) will have the best future economically, I think a diversified index fund might be a prudent way to have natural gas in a portfolio.
dukeblue219
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Re: Natural Gas Index Fund

Post by dukeblue219 »

That's not really an index fund, since it won't be tracking an index but a relatively small sector. XOP is the biggest exploration and production ETF I've seen, but that's still going to incorporate a lot of oil and not purely gas. Hard to have a fund that invests only in gas since so many large energy companies are broadly diversified now.
runner3081
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Re: Natural Gas Index Fund

Post by runner3081 »

Be careful if they are an MLP that spins off a K1. Not hard, but just adds a bit of time to taxes and a long wait for the annual K1.
260chrisb
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Re: Natural Gas Index Fund

Post by 260chrisb »

I've held GASFX for years.
MarkBarb
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Re: Natural Gas Index Fund

Post by MarkBarb »

I don't know of such a fund. I worked in upstream oil and gas for a couple of decades, though, so I have a few points to make.

First, there are a lot of layers to the natural
First, as far as production goes, there aren't really pure oil or pure gas companies. They are all a mixture. Oil wells produce some gas and gas wells produce some oil. So on the upstream side, you'll either miss a lot of natural gas production or you'll be buying a lot of oil production as well.

While it is less common than it used to be, there are several companies that own a mixture of natural gas production and chemicals processing. While most people think of natural gas as something burned in homes for heat and in power plants to generate electricity, a lot of it is used in the production of plastics and chemicals.

Oil is relatively easy to transport, so there is a worldwide market. Gas is shipped mostly via pipelines and so it is hard to ship to areas not connected by pipelines. It can be liquified and shipped, but that is a very expensive and capital intensive process. We'll eventually see more US gas shipped as LNG, but it will be a long time before that impacts the US market.

That's a problem for US producers. With the shale/fracking revolution, we have far, far, far more natural gas available than what is in demand. For the most part, it sells for the marginal cost of production. It's enough to keep companies in business, but not enough to earn much of a profit. When prices go up, it is very easy to produce more and that brings prices back down fairly quickly. Even worse, the people producing oil produce gas as a byproduct and they'll sell it even when market forces push the price of gas below the cost of production.

You don't explain why you want an index fund for a slice of the energy/chemicals market. I'd say that you are probably better off just relying on a total market fund. If you are trying to hedge, it doesn't make much sense to hold the entire vertical from gas production to retail. If you are trying to be on a rise in natural gas prices, good luck to you.
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DTalos
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Re: Natural Gas Index Fund

Post by DTalos »

MarkBarb wrote: Mon May 17, 2021 7:13 pm I don't know of such a fund. I worked in upstream oil and gas for a couple of decades, though, so I have a few points to make.

First, there are a lot of layers to the natural
First, as far as production goes, there aren't really pure oil or pure gas companies. They are all a mixture. Oil wells produce some gas and gas wells produce some oil. So on the upstream side, you'll either miss a lot of natural gas production or you'll be buying a lot of oil production as well.

While it is less common than it used to be, there are several companies that own a mixture of natural gas production and chemicals processing. While most people think of natural gas as something burned in homes for heat and in power plants to generate electricity, a lot of it is used in the production of plastics and chemicals.

Oil is relatively easy to transport, so there is a worldwide market. Gas is shipped mostly via pipelines and so it is hard to ship to areas not connected by pipelines. It can be liquified and shipped, but that is a very expensive and capital intensive process. We'll eventually see more US gas shipped as LNG, but it will be a long time before that impacts the US market.

That's a problem for US producers. With the shale/fracking revolution, we have far, far, far more natural gas available than what is in demand. For the most part, it sells for the marginal cost of production. It's enough to keep companies in business, but not enough to earn much of a profit. When prices go up, it is very easy to produce more and that brings prices back down fairly quickly. Even worse, the people producing oil produce gas as a byproduct and they'll sell it even when market forces push the price of gas below the cost of production.

You don't explain why you want an index fund for a slice of the energy/chemicals market. I'd say that you are probably better off just relying on a total market fund. If you are trying to hedge, it doesn't make much sense to hold the entire vertical from gas production to retail. If you are trying to be on a rise in natural gas prices, good luck to you.

Thank you for your insight. An index fund is attractive for someone who is unfamiliar with the different segments (upstream, downstream., midstream) and their future profitability.

For example, today, major oil stocks are down significantly, but XLE is not down as much because they are diversified.
MarkBarb
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Re: Natural Gas Index Fund

Post by MarkBarb »

DTalos wrote: Tue May 18, 2021 11:02 am Thank you for your insight. An index fund is attractive for someone who is unfamiliar with the different segments (upstream, downstream., midstream) and their future profitability.

For example, today, major oil stocks are down significantly, but XLE is not down as much because they are diversified.
If someone is unfamiliar with the industry, they should probably stick to a total market index fund. To be frank, even if someone is knowledgeable about the industry, I think they should stick to a total market index fund.

The industry swings back and forth on diversification. Sometimes it is popular. People want integrated oil companies because they make money on production when prices are high and they make money on refining and chemicals when prices are low. But when prices get high, they see that diversification as a drag on their upstream business. I guess by buying an index with all of them, you stay diversified whether it is in fashion or not.

I loved working in the energy industry. High revenue per employee helped support high pay and benefits. I was getting 7 weeks of vacation, a pension, a 6% 401K match, good base pay, and great bonuses. But despite all that, I didn't invest in the industry. Too volatile. Boom and bust. Even when I worked for a company that I loved and had great faith in, I sold my RSUs when they vested and put the money into a total market index fund.
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abuss368
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Re: Natural Gas Index Fund

Post by abuss368 »

I would be careful. Most are Master Limited Partnerships (or Publicly Traded Partnerships) that provide a lot of additional reporting by issuing IRS Form K-1 each year. In addition, if the income is high enough, the investor may have to file tax returns in multiple states.

In addition, this is a sector. Jack Bogle has often said most investors could go their entire life without the need for a sector fund.

Focus on buying the haystack instead.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
DTalos
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Re: Natural Gas Index Fund

Post by DTalos »

abuss368 wrote: Tue May 18, 2021 7:12 pm I would be careful. Most are Master Limited Partnerships (or Publicly Traded Partnerships) that provide a lot of additional reporting by issuing IRS Form K-1 each year. In addition, if the income is high enough, the investor may have to file tax returns in multiple states.

In addition, this is a sector. Jack Bogle has often said most investors could go their entire life without the need for a sector fund.

Focus on buying the haystack instead.

Tony


Good information. Master Limited Partnership is a phrase, like annuity, that causes me to be very wary.
Dudley
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Re: Natural Gas Index Fund

Post by Dudley »

Take a look at ENFR.
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