People have been up in arms for months now about the troubles at the United States Natural Gas Fund, LP (UNG), the ETF designed to track the price of natural gas. And, as far as I can tell, rightly so. ETFs were meant to be a nearly frictionless, relatively simple alternative to the clunky closed-end funds (CEFs) and managed products that our parents and grandparents had to contend with. But UNG recently traded at a 19% premium to its net asset value (NAV) -- behavior far more fitting a CEF. And until UNG begins issuing new shares, it functionally is a closed-end fund. For more on the natural gas ETF, see Tread Carefully When Trading UNG.

Why the premium? Regulators are concerned that, given its size, UNG purchases of natural-gas futures could overwhelm and distort the market. Some sort of Commodities Trading Futures Commission (CTFC) action is expected, and one review suggests that any likely outcome will result in a dissipation of the fund’s premium to NAV. That’s a good reason not to buy UNG here, and it may offer a good opportunity for a statistical-arbitrage play for those with the stomach and expertise: The trade would be to buy natural gas futures and sell short the ETF -- or, since the shares are hard to borrow, competent options traders will establish a synthetic short position by selling calls and buying puts with the same strike price and expiration date -- on the expectation of UNG eventually returning to its net-asset value.

But since hand-wringing over UNG seems to be the consensus approach, here’s a contrarian thought: UNG has, to date, tracked natural gas futures (NG) fairly well. The chart below compares UNG and NG prices in 2009:



Or, statistically:



We can agree that the spread between UNG and NG over the summer was a cause for concern among UNG shareholders (and what would have happened if the futures hadn’t turned south again in August?). But overall, things appear to be in order. In 2009, the natural-gas ETF has tracked natural-gas futures almost as closely as SPY prices have correlated with Emini S&P 500 futures. None of this diminishes the case against UNG -- after all, the fear is of either a regulatory event or a market dislocation at some future date. And until those worries are resolved, shareholders are taking on risks for which they aren’t being compensated.

But so far, they haven’t been punished for taking the bet.