UGAZ Decay Quantified: A Sure Path To Lose Money

4:58 pm ET, 12 Dec 2017

UGAZ depression

Today, the shares of VelocityShares 3X Long Natural Gas ETN (UGAZ) fell more than 12%, causing a lot of panic selling.  The perennial debate among investors in 3X ETN securities is to whether to hold those securities or sell them and recognize the loss when such steep declines occur. 

The purpose of this Finstead Bite is to help you realize how much money you're losing by investing long-term in securities with pronounced decays, such as UGAZ.  We will quantify the decay for UGAZ.   

First, let's cover the basics.  UGAZ is an exchange-traded note based on the S&P GSCI Natural Gas Excess Return Index.  It is intended for sophisticated investors to manage daily trading risks. UGAZ is significantly riskier than securities with long-term investment objectives and is predominantly used by day traders.  

What many investors don't understand is that UGAZ price is only indirectly tied to the price of natural gas.  UGAZ attempts to be a direct derivative (+3X) of the S&P GSCI Natural Gas Excess Return Indexbut often doesn't accomplish this mission, particularly in the longer term.    

This S&P GSCI Natural Gas Excess Return Index is composed entirely of natural gas futures contracts and is derived by reference to the price levels of the futures contracts on natural gas, along with the discount or premium obtained by rolling hypothetical positions in such contracts forward as they approach delivery.

Now, let's look at the UGAZ price for two dates where the S&P GSCI Natural Gas Excess Return Index roughly had the same value, 10.3.  The Index achieved this value on March 4, 2016, and December 5, 2017.  UGAZ end-of-day price on the former date was 17.92, and it was 7.54 on the latter day.  




DateNatGas ER Index UGAZ price ($)
03/04/201610.317.92
12/05/201710.37.54

 

Between those two dates, UGAZ price declined -58%, while the Index stayed flat.  

If you annualize the impact of decay, the loss you can expect to see by investing in UGAZ is -39% per annum.  That means, for every $10,000 invested in UGAZ at the beginning of the year, you should expect to see $6,100 at the end of the year assuming no change to the Natural Gas Excess Return Index. 

The takeaway is simple: do not invest in UGAZ long term, because the consequences may be catastrophic.     

UGAZ long-term return confirms this point.  Over the last year, UGAZ returned -74.21% (see the chart below).

Disclaimer: The news article above expresses the author’s opinion about the topic of the article. We strongly advise you not to base your investment decisions just on this article alone. If you’d like to become a writer for Finny Bites, please send us an email at hi@askfinny.com.

UGAZ: No Sign Of Recovery?

11:19 pm ET, 04 Dec 2017

natural gas pipeline

VelocityShares 3X Long Natural Gas ETN (NYSEARCA: UGAZ) is one of the worst performing ETFs since the beginning of the year.  Its dismal performance is driven predominantly by suppressed natural gas prices. 

The reason why natural gas prices are low is that supply has been abundant, and demand growth has been weaker than expected (partially due to mild weather), which drove the prices down.    

Future gasoline demand growth in the US is likely to stagnate.  In the near term, we see two key elements that have driven the recent growth in gasoline demand running out of steam: prices are unlikely to decrease further significantly, and unemployment levels are unlikely to improve much more.

In 2018, we are likely to see higher gasoline prices than we saw in 2015-16.  Although lower prices have been the primary variable, we think steadily improving employment levels have also contributed to a recovery in gasoline demand. Typically, higher levels of employment would mean more commuting--that is, more miles driven. With unemployment currently at 4.4%, further improvement compared with the past several years is likely to be limited, given that the lowest point on record is 3.8%.  

Also, the market for Liquified Natural Gas (LNG) is fairly nascent.  It may not impact the demand for natural gas in the near term.

Over the last year, VelocityShares 3X Long Natural Gas ETN (UGAZ) has returned -74.21%.

Over the last year, VelocityShares 3X Inverse Natural Gas ETN (DGAZ) has returned +1.87%.

Disclaimer: The news article above expresses the author’s opinion about the topic of the article. We strongly advise you not to base your investment decisions just on this article alone. If you’d like to become a writer for Finny Bites, please send us an email at hi@askfinny.com.

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