FCG vs UNG: Natural Gas ETFs' Diverging Trajectories Exposed

The First Trust Natural Gas ETF (FCG) and the United States Natural Gas Fund (UNG) seem to be moving in opposite directions, despite being related to natural gas. While FCG appears healthy, UNG is falling apart. This divergence can be attributed to the fact that they are two different asset classes.

FCG is an equity fund holding 45 public energy companies, including E&P and midstream firms. These companies have been generating cash flow due to high oil prices supported by Middle East geopolitical risks and power-demand narratives. As a result, FCG behaves like a resilient energy equity ETF.

On the other hand, UNG holds front-month natural gas futures contracts traded on the NYMEX. This exposes it to contango, which is a market condition where future delivery months are priced higher than the expiring current-month contract. Additionally, UNG's managers are forced to sell cheaper near-month futures contracts and buy more expensive next-month contracts, resulting in roll yield decay.

This structural flaw causes UNG to bleed value every month, even if spot natural gas prices remain stagnant. This is a key distinction between FCG and UNG, as the former invests in businesses that generate cash flow, while the latter buys futures contracts that drain capital.