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Teucrium, the exchange traded fund (ETF) provider behind Teucrium Corn (NYSEArca: CORN) is out with its next fund: a natural gas ETF based on a strategy that mitigates the corrosive effects of contango.
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Teucrium Natural Gas (NYSEArca: NAGS) is built around a benchmark Teucrium created that’s specific to natural gas.
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Teucrium co-founder and President Sal Gilbertie – a former natural gas trader himself – explains that the fund is 25% each of four futures contracts: March, April, October and November. Those months are otherwise known as “shoulder months,” when demand has the potential to make a big move in one direction or another.
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Focusing the fund on those months has the potential to give natural gas investors some big benefits, while addressing a couple of the recent issues concerning commodity funds that have cropped up in recent years.
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The first is that the Commodity Futures Trading Commission (CFTC) investigated the role, if any, of futures-based ETFs in moving the prices of their underlying markets. The inquiry came as a result of the record run-up in oil prices in 2008, but no conclusive answer was ever really found.
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More recent scrutiny has centered around the role of contango – when the spot price is lower than the futures price – in the performance of commodity funds.
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Teucrium deals with the pricing and contango issues that often plague other futures-based ETFs by avoiding trading the spot month altogether.
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“We don’t ever want to be in any discussion on whether they’re going to affect prices. If you avoid spot, that’s where the effect is the most extreme,” Gilbertie says.
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Structuring a fund around the shoulder months keeps a lid on portfolio turnover. Only 25% of the portfolio is rolled four times a year, limiting turnover to 100%.
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If you’re rolling the spot contract, Gilbertie says, turnover rockets up to 1,200%, since you need to roll every month.
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The Future of Natural Gas
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Although Teucrium doesn’t make pricing forecasts – they only provide products that give investors the ability to act on their own sentiments – Gilbertie’s opinion about the natural gas market is that it’s in oversupply and has been for some time.
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“You’ve got horizontal drilling technologies that are so vastly improved in the last few years, you have efficiencies in production and a really good supply,” he says.
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Unfortunately, that efficiency has resulted in a flood of natural gas that has pushed the market into a weakened cycle.
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“I liken it to the 1990s: so much natural gas came out and prices came down, but then demand skyrocketed.”
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Although the launch of the natural gas fund and other ETFs is dictated by a provider’s ability to meet the various regulatory requirements on the way to approval, Gilbertie believes that this is a perfect time to bring such a fund to market.
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“Assets tend to flow in when we’re in a down cycle,” he says. On top of that, a down market will give investors time to watch NAGS and see how it works.
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