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Futures versus ETF

This shot depicts two things:

1 – there doesn’t have to be a correlation between and ETF/ETN and the commodity it holds.

2 – If you have the institutional mindset of “long-only” and you own assets in futures that trade in what are called contango or carry – charge markets, you will find yourself in a situation where you have to liquidate the front month (cheaper) to purchase the next (higher) month out when you roll the contracts.

Such markets are characteristic of commodities with ample supply and the spreads suggest storage, rather than immediate demand.

Hmm? Curious to see a company such as UNG make such a mistake. They seem to have some educated, and highly intelligent members of their team, however, my guess is none are traders. Click on the graphic below to see it more clearly.

Here is a look at what is called the strip – the prices for each successive contract for the calendar. You’ll notice that for the most part, contract prices increase the further you go out in the strip. (Click on the graphic, and it will open to the full size).

The only way to trade this type of market (carry-charge) would be to implement a spread trade. Unless there happens to be a random spike in Natural Gas prices, you’re out of luck with this vehicle. This would be true for any other commodity as well.

I will write more about how to use spreads in this situation in another post. Please email me if you have something specific you’d like to know.

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