Unlocking Explosive Profits: The Definitive Guide to Top Natural Gas ETFs Driving Big Returns in 2025

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Executive Summary

Natural gas exchange-traded funds (ETFs) are highly specialized investment vehicles that offer exposure to one of the world’s most volatile commodities. The analysis shows these funds are best understood as tools for short-term trading and hedging rather than conventional long-term investments. This is primarily due to a complex market dynamic known as “contango,” which can lead to significant value erosion over time, causing funds to underperform the underlying commodity’s spot price.

As of mid-2025, the natural gas market is influenced by a delicate balance of strong U.S. production, increasing global liquefied natural gas (LNG) demand, and shifting domestic consumption patterns. This creates a fertile ground for opportunities, particularly for sophisticated traders who understand the inherent risks. This report provides a detailed breakdown of the top natural gas ETFs, separating those that track the commodity’s price through futures from those that invest in the equities of natural gas companies. A key distinction is highlighted between these two strategies and their wildly divergent risk-reward profiles.

The Big List: Top Natural Gas ETFs to Watch for 2025

United States Natural Gas Fund (UNG): The largest and most liquid ETF for gaining direct exposure to the daily price movements of natural gas futures.
First Trust Natural Gas ETF (FCG): A leading equity-based ETF that invests in the stocks of natural gas production and infrastructure companies, offering a different, potentially more stable, exposure to the sector.
ProShares Ultra Bloomberg Natural Gas (BOIL): A leveraged ETF designed for aggressive traders seeking to amplify returns from short-term price increases.
ProShares UltraShort Bloomberg Natural Gas (KOLD): An inverse leveraged ETF for sophisticated traders looking to profit from a decline in natural gas prices.
United States 12 Month Natural Gas Fund (UNL): An alternative futures-based ETF that attempts to mitigate the long-term value decay issues faced by UNG by diversifying across a longer futures curve.

Key Natural Gas ETF Comparison

ETF Ticker	Investment Strategy	Total Assets (AUM)	Expense Ratio	YTD Return	1-Year Return	5-Year Return	Max Drawdown	Volatility	Dividend Yield
UNG	Futures-Based	$583.20M	1.06%	-27.48%	+0.63%	-77.69%	-99.14%	12.39%	0.00%
FCG	Equity-Based	$333.9M	0.60%	-2.09%	-7.47%	+29.98%	-97.20%	5.71%	2.79%
BOIL	Leveraged Futures	Not Specified	0.95%	-35.92%	-24.22%	-58.06%	-99.59%	Not Specified	Not Applicable
KOLD	Inverse Leveraged	Not Specified	Not Specified	Not Specified	Not Specified	Not Specified	Not Specified	Not Specified	Not Applicable
UNL	Futures-Based (12-Month)	$10.91M	0.90%	-7.59%	+6.20%	-13.37%	-88.01%	6.45%	0.00%

Note: All data for BOIL and KOLD is indicative and subject to extreme volatility and daily rebalancing, rendering long-term performance metrics less relevant.

Understanding How Natural Gas ETFs Really Work

Futures vs. Equities: Two Distinct Strategies

A crucial first step in evaluating natural gas ETFs is to understand their fundamental investment strategy. These funds can be broadly categorized into two distinct types: futures-based and equity-based. The choice between them is a choice between two entirely different investment theses and risk profiles.

Futures-Based Strategy

Funds such as the United States Natural Gas Fund (UNG) employ a futures-based strategy to provide exposure to the natural gas market. Rather than owning physical natural gas, which is flammable, volatile, and difficult to store and transport, these ETFs hold standardized futures contracts. A natural gas futures contract is a financial agreement to buy or sell a specific quantity of natural gas at a predetermined price on a designated future date. For UNG, the benchmark is the price of natural gas delivered at the Henry Hub in Louisiana, which serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX).

The purpose of this strategy is to give investors an opportunity to profit from or hedge against the daily price movements of the natural gas commodity itself without needing a dedicated commodity futures account. This structure offers the advantages of a stock-like instrument, including intraday pricing, liquidity, and the ability to place market and stop orders. However, the indirect nature of this exposure introduces a unique and powerful risk that is not immediately apparent to new investors.

Equity-Based Strategy

In contrast, equity-based natural gas ETFs, exemplified by the First Trust Natural Gas ETF (FCG), operate more like a traditional stock fund. Instead of holding futures contracts, these funds invest in the stocks of companies involved in the natural gas sector, including those focused on exploration, production, and midstream activities.

The performance of an equity-based ETF is tied to the financial health, profitability, and stock market performance of the underlying companies, not directly to the volatile daily spot price of the commodity. These funds are insulated from the complexities of the futures market, offering a more stable and less volatile investment option. They can also provide a dividend yield, which is common among profitable corporations in the energy sector, but is impossible for futures-based funds.

Decoding Contango and Backwardation: The Hidden Cost of Commodity Investing

The single most important concept to grasp when considering a futures-based natural gas ETF is the “contango” effect. This technical market condition is the primary reason why these funds are generally not suitable for long-term holding.

What is Contango?

Contango describes a market condition where the futures price of a commodity is higher than its current spot price. This creates an upward-sloping futures curve, with prices for contracts that expire further in the future being progressively more expensive. This is considered a normal market state for many commodities because of the “carrying costs” associated with physical storage, such as warehousing, financing, and insurance.

The opposite condition, known as “backwardation,” occurs when futures prices are lower than the spot price, which often signals a tight supply or a very high current demand.

The Contango Effect Explained

The destructive power of contango for a futures-based ETF like UNG is a direct result of its investment strategy. A fund like UNG holds the “front-month” futures contract—the one with the closest expiration date.

Step 1: As the front-month contract approaches expiration, the fund must “roll” its position. This is a process where the fund sells its current, expiring contract and purchases a new contract for the following month.
Step 2: In a market state of contango, the new contract is more expensive than the one being sold. This is an unavoidable reality of the market structure.
Step 3: To acquire the new, more expensive contract, the fund must use the proceeds from selling the old one. This means it can only purchase a smaller quantity of the new contract, resulting in a steady and persistent erosion of the fund’s net asset value (NAV) over time.

This process creates a paradoxical and powerful force working against the long-term investor. The fund’s value can decline even if the spot price of natural gas remains stable or even increases, as the continuous “roll cost” acts as a persistent drag on performance. This is not a theoretical risk; the United States Natural Gas Fund (UNG) has experienced a jaw-dropping -99.80% decline in value since its inception, a phenomenon that is not attributable to a decline in the commodity’s price but to the devastating, compounding effect of contango. This is why these funds are explicitly suited for short-term trading and hedging, not for a buy-and-hold strategy.

Futures vs. Equity ETF Strategies

Category	Futures-Based ETFs (e.g., UNG, UNL)	Equity-Based ETFs (e.g., FCG)
Underlying Asset	Futures contracts on a commodity like natural gas.	Stocks of companies involved in the natural gas sector.
Primary Price Driver	The daily price movements of the underlying commodity, such as Henry Hub natural gas.	The financial performance and stock price of the underlying companies.
Key Risk	Contango (value erosion), volatility, and tracking error.	Market risk, company-specific risk, and sector-wide economic risk.
Typical Use Case	Short-term trading, hedging, and speculating on daily price movements.	Long-term investment exposure to the natural gas industry, with potential for dividends.
Tax Form	Form Schedule K-1	Form 1099-DIV or 1099-B

The Contango Effect: An Analogy

Scenario	Futures-Based ETF Analogy	Outcome
Buying at the gas pump	An investor buys the UNG fund.	The price is based on the current price of gas, plus a small fee. The investor pays for the commodity, and the price they paid is now directly tied to the commodity’s spot price.
Buying gas for next month	An investor buys a futures contract for next month’s gas.	The price for next month is slightly higher to account for the costs of storing the gas until then. The investor has locked in a future price, but it is more expensive than the current price.
The “Roll” process	As the front-month futures contract nears expiration, the ETF manager must “roll” the fund’s position by selling the expiring contract and buying a new one for the next month.	In a contango market, the new contract is more expensive than the one being sold. This transaction results in a loss of “quantity” for the fund, as the same amount of capital buys fewer contracts.
Compounding decay	This rolling process is repeated every month, month after month.	The fund’s total value consistently erodes over time, regardless of whether the natural gas spot price is rising or falling. The long-term investor sees their investment lose value.

A Deep Dive into the Top ETFs

United States Natural Gas Fund (UNG): The King of Liquidity, The King of Contango

The United States Natural Gas Fund (UNG) is the most widely recognized and liquid natural gas ETF on the market. Its investment objective is to track the daily price movements of natural gas delivered at the Henry Hub, Louisiana. It achieves this by primarily holding a portfolio of natural gas futures contracts that are set to expire within the next month.

Despite its straightforward objective, UNG’s performance has been anything but. A review of its key metrics reveals the harsh realities of its structure :

Total Assets (AUM): $583.20 million.
Expense Ratio: 1.06%.
Performance: YTD return of -27.48% is a clear indicator of recent market weakness, but its long-term performance is even more telling. The fund has an astonishing 5-year return of -77.69% and an all-time return of -99.80%.
Volatility: UNG has an exceptionally high volatility of 12.39%, which indicates that its price experiences significantly larger fluctuations than its peers.

The extreme decline in UNG’s long-term value is not a reflection of a 99.8% drop in the value of natural gas itself. Instead, it is the direct outcome of the compounding contango effect. A high degree of volatility amplifies this effect, creating a cycle where rapid price swings necessitate more frequent and costly contract rolling, which in turn accelerates the decay of the fund’s net asset value. This confirms that UNG is not a long-term investment vehicle; its purpose is to provide a highly liquid instrument for short-term speculation on daily price movements. The fund’s advantages, such as its high liquidity and robust options chain, are exclusively beneficial to active traders with short investment horizons and a deep understanding of futures market dynamics.

First Trust Natural Gas ETF (FCG): The Equity-Based Alternative

For investors seeking exposure to the natural gas sector without the direct risk of futures contracts, the First Trust Natural Gas ETF (FCG) presents a compelling alternative. This fund tracks an index composed of mid- and large-cap companies that derive a substantial portion of their revenue from natural gas exploration, production, and midstream activities.

The fund’s financial metrics reflect its distinct strategy :

Total Assets (AUM): $333.9 million.
Expense Ratio: A more favorable 0.60%.
Performance: While its recent performance has been volatile (YTD -2.09%, 1-Year -7.47%), its 5-year return of +29.98% stands in stark contrast to the losses of futures-based funds.
Volatility: At 5.71%, FCG’s volatility is less than half that of UNG, indicating a much more stable price trajectory.
Dividend Yield: FCG offers a dividend yield of 2.79%, providing a source of income that is absent in futures funds.

The significant divergence in long-term performance between FCG and its futures-based peers stems from its focus on company profitability rather than commodity price. The fund’s value is tied to the strength of its underlying holdings, which include major players like ConocoPhillips, Occidental Petroleum, and Devon Energy. These corporations can generate revenue and profits even when natural gas prices are subdued, and their stock performance is influenced by a multitude of factors beyond the immediate commodity price. This makes FCG a genuine investment for those who wish to participate in the natural gas industry over the long term, with the potential for both capital appreciation and dividend income.

The Leveraged and Inverse Plays: BOIL & KOLD

For the most aggressive and experienced traders, products like the ProShares Ultra Bloomberg Natural Gas (BOIL) and ProShares UltraShort Bloomberg Natural Gas (KOLD) offer amplified exposure to daily price movements. BOIL seeks to provide two times (2x) the daily performance of its benchmark index, while KOLD is designed to return two times the inverse (-2x) of the index’s daily performance.

These leveraged and inverse funds are not investment products; they are speculative trading instruments. The inherent risks are explicitly acknowledged by the fund sponsors themselves, with warnings that they are “not intended to be held overnight, because their returns over longer periods generally do not match the ETP’s multiple of the underlying index over those periods”. The primary reasons for this profound value decay are twofold:

Leverage Decay (Beta Slippage): This is a mathematical reality of daily rebalancing. Over time, the compounding of daily gains and losses can cause the fund’s long-term performance to diverge significantly from its stated objective. For example, a 25% gain followed by a 20% loss on a given asset results in a net neutral change, but a 2x leveraged ETF would see a 50% gain followed by a 40% loss, resulting in a net decline of 10%.
Amplified Contango: Like UNG, these funds also suffer from the roll costs of contango, but their leveraged structure amplifies this drag, accelerating the erosion of value.

The documented historical drawdowns for these funds are a stark testament to these risks, with BOIL having a 3-year drawdown of -99.59%. For this reason, these instruments should only be considered by highly sophisticated, active traders with a robust understanding of futures markets and a disciplined risk management strategy.

A Broader View: The UNG vs. UNL Comparison

The United States 12 Month Natural Gas Fund (UNL) is an interesting variant of the futures-based strategy, specifically designed to address some of UNG’s key shortcomings. While UNG focuses on the single, most volatile front-month futures contract, UNL tracks the daily price movements of natural gas by holding an equally weighted average of the near-month contract and the contracts for the following 11 consecutive months.

This diversification across a 12-month futures curve is a deliberate attempt to mitigate the concentrated effects of contango and volatility. The data confirms this strategy has a tangible impact :

Volatility: UNL’s volatility of 6.45% is nearly half that of UNG’s 12.39%.
Drawdown: UNL’s maximum drawdown of -88.01% is less severe than UNG’s -99.14%.
Performance: In the year-to-date period, UNL’s -7.59% return, while still a loss, is significantly better than UNG’s -27.48%.

While UNL and UNG are highly correlated (0.94), the data shows that UNL’s strategy of smoothing out the futures curve has been successful in creating a less volatile and less punishing instrument for those who want futures-based exposure over a slightly longer time horizon.

Beyond the Ticker: The Macro Forces Driving the Market

Supply, Demand, and the Power of Weather

The pricing of natural gas is a complex interplay of fundamental factors, with supply and demand dynamics serving as the primary drivers of cost. Natural gas is a highly seasonal commodity; a harsh winter or a hot summer can cause significant price spikes due to a surge in demand for heating or cooling. Cooler temperatures in the Northeast, for instance, were a key factor in the recent decrease in demand for the electric power sector, a significant consumer of natural gas.

Storage levels are also a crucial metric for market watchers. Adequate reserves in the more than 400 U.S. natural gas storage facilities can help meet peak demand and keep prices in check, while low levels can create scarcity and put upward pressure on prices.

The demand for natural gas is not a static force. Total U.S. natural gas consumption is expected to set a new record in 2025, but the composition of that demand is shifting. While natural gas is losing market share to renewables like solar and wind in the electric power sector, consumption is growing in the residential, commercial, and industrial sectors. This indicates a nuanced future for the commodity, as it becomes a critical partner for ensuring grid stability in an energy mix increasingly dominated by intermittent renewables.

Geopolitics and American LNG Dominance

Geopolitical events can have a profound and immediate impact on natural gas prices. The 2022 Russian invasion of Ukraine, for example, highlighted the strategic importance of U.S. liquefied natural gas (LNG). U.S. LNG exports helped European allies withstand the economic shock of a reduction in Russian gas supplies and maintain energy security. The U.S. has cemented its position as a global energy leader, producing 25% of the world’s natural gas supply, with significant portions being exported to Europe and Asia.

The long-term outlook for global gas markets is for demand to slow in 2025 but to accelerate again in 2026 as new LNG projects come online in the United States, Canada, and Qatar. This creates a fascinating dynamic between domestic supply and global demand. Strong international demand for U.S. LNG exports can put upward pressure on domestic prices, but this is counterbalanced by record-high U.S. dry natural gas production. The U.S. market is no longer isolated; its pricing is a reflection of the complex interplay between domestic production capacity, global export demand, and international geopolitical stability. This makes a thorough understanding of macroeconomics a prerequisite for any nuanced analysis of natural gas ETF performance.

The Bottom Line: Key Risks and Considerations

Tax Implications: K-1 vs. 1099

Beyond performance metrics and market mechanics, a major consideration for investors is the tax reporting associated with these funds. The type of tax form an investor receives can significantly complicate their filing process.

The Schedule K-1

Futures-based ETFs like UNG and UNL are structured as limited partnerships for tax purposes. This requires them to issue a Schedule K-1 to each investor annually, rather than the more common Form 1099. The K-1 is a complex form that reports an investor’s share of the partnership’s income, losses, and deductions. This is a significant logistical hurdle that can complicate tax returns, even for holdings within a tax-exempt account like an IRA. Additionally, these funds are subject to “mark-to-market” taxation, meaning that unrealized gains from futures contracts at the end of the year are treated as if they were sold, and any resulting gain or loss must be reported. This administrative burden is a form of cost that is not reflected in the expense ratio and can be a significant deterrent for many investors.

The Form 1099

In contrast, equity-based ETFs like FCG issue the familiar Form 1099-DIV, which reports dividend income and capital gains distributions. This process is more straightforward and familiar to the average investor, simplifying tax preparation and avoiding the complexities of a K-1.

Summary of Key Risks

Contango: The single most destructive force for futures-based ETFs, causing persistent value erosion over the long term.
Price Volatility: Natural gas prices are highly sensitive to sudden changes in weather, supply levels, and geopolitical events.
Tracking Error: The fund’s performance may not perfectly replicate the underlying commodity or index due to fees, expenses, and rolling costs.
Leverage Decay: For leveraged funds like BOIL and KOLD, the compounding of daily returns can lead to a significant divergence from the stated objective, causing severe long-term losses.
Tax Complexity: The requirement to file a Schedule K-1 for futures-based ETFs introduces a significant administrative burden and can complicate an investor’s tax situation.

FAQs (Frequently Asked Questions)

What is an ETF? An ETF is an exchange-traded fund, a collection of assets such as stocks, bonds, or commodities, that can be bought and sold on a stock exchange like a single stock. ETFs generally offer liquidity and diversification at a low cost.
What is the objective of investing in a natural gas ETF? The objective is to gain exposure to the natural gas market, whether to profit from price movements, hedge against price changes, or diversify an investment portfolio.
How do natural gas ETFs track the price of natural gas? Most natural gas ETFs track the commodity’s price by investing in natural gas futures contracts, which are financial agreements to buy or sell the commodity at a future date.
Do natural gas ETFs physically hold natural gas? No, most natural gas ETFs do not hold physical natural gas. Instead, they invest in futures contracts that provide indirect exposure to the commodity’s price movements.
Why do natural gas ETFs lose value over time? The primary reason is contango, a market condition where futures contracts are more expensive than the current price of natural gas. As the ETF must constantly “roll” its expiring contracts, it is forced to buy the new, more expensive ones, leading to a steady and persistent erosion of the fund’s value.
Are natural gas ETFs a good long-term investment? Generally, no. Due to the effects of contango and high volatility, futures-based natural gas ETFs are best suited for short-term trading or hedging rather than long-term, buy-and-hold investing.
What is the Henry Hub? The Henry Hub is a natural gas pipeline in Louisiana that serves as the official delivery location and pricing benchmark for natural gas futures contracts on the New York Mercantile Exchange (NYMEX).
What is the difference between a natural gas ETF and a natural gas ETC? An ETF is a diversified fund, while an ETC (Exchange Traded Commodity) typically tracks a single commodity. In some regions, like the EU, regulations prohibit a natural gas ETF, so investors can only gain exposure via an ETC.