Things Are Getting Worse For This Natural Gas ETF

Over 110 exchange traded products hit all-time lows Tuesday and, at this point, it probably isn't surprising that the First Trust ISE-Revere Natural Gas Index Fund FCG was one of those offenders.

On volume that was nearly 64 percent above the trailing 90-day average, FCG lost 8.6 percent, a loss that was exceeded by just three other ETFs on a percentage basis. Stripping out leveraged ETFs, FCG was Tuesday's worst-performing ETF on a percentage basis.

As has been previously noted in this space, some of FCG's 30 holdings are facing credit and liquidity issues. Tumbling oil prices drained the financial positions of an array of mid- and small-cap shale producers, prompting scores of credit downgrades and sparking concerns over a spate of defaults. Lenders to some of the companies found in FCG are refusing to extend further credit to those firms.

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In fact, some banks that lend to shale producers are tightening liquidity requirements, which could be seen as a sign these lenders don't want to be left with nothing if their borrowers go bankrupt. Highly leveraged oil and gas producers, including some found in FCG's lineup, are also attracting interest from short sellers.

"Investors have been voting with their cash over the last 12 months, with companies in the sector seeing the value of their equity plummet. Short sellers have also benefited by targeting energy names, but highly leveraged firms could add more returns to the shorts as oil producers are pushed to the brink," said Markit in a recent note.

Markit identifies several highly leveraged oil and gas names that have seen significant increases in short interest over the past year, including Chesapeake Energy Corporation CHK, Southwestern Energy Company SWN and Rexx Energy Corporation REXX.

According to Markit data, the average percentage of shares sold short in that trio of stocks is 35 percent. Over the past year, short interest in Chesapeake and Southwestern has more than quadrupled and tripled, respectively. Southwestern, Chesapeake and Rexx combine for about 12 percent of FCG's weight. SM Energy Co SM, another FCG component, has seen its short interest surge nearly 600 percent over the past year, according to Markit data.

It might be trite to say, but where there are losers, there are winners and there is one ETF benefiting from FCG's demise. With its nearly 27 percent gain Tuesday, the Direxion Daily Natural Gas Related 3X Bear Shares GASX has surged about 115 percent just since the start of January, making it the top performer among Direxion's leveraged bearish ETFs.