Dare To Short Natural Gas? This Might Be The Way To Do It

Traders bold enough to short natural gas via leveraged exchange traded funds or exchange traded notes are learning some harsh lessons. On Wednesday, the commodity enjoyed its best one-day rally in over 14 years, doling out severe punishment to inverse ETFs and ETNs.

Just look at the VelocityShares 3x Inverse Natural Gas ETN DGAZ. DGAZ, which attempts to deliver triple the daily inverse returns of the GSCI Natural Gas Index, slid 55.59 percent on volume that was more than 16 times the daily average yesterday.

What Happened

The slide experienced by DGAZ on Wednesday was the second-worst ever on an intra-day basis for a US-listed exchange traded product. Clearly, being short natural gas has been hazardous to traders' health this month, but there is a better way of making bearish natural gas bets in the ETF space.

Enter the Direxion Daily Natural Gas Related Bear 3X Shares GASX. GASX is not a not a bearish play on natural gas futures. Rather, the fund is designed to deliver triple the daily inverse performance of the ISE-Revere Natural Gas Index (FUMTR).

Why It's Important

The utility of GASX at a time when natural gas futures are surging is clear. The aforementioned ISE-Revere Natural Gas Index is an equity-based benchmark with no futures exposure. This is relevant because even though natural gas futures are surging, the same cannot be said of natural gas-related equities. Wednesday paints that picture.

Yesterday, the futures-based United States Natural Gas Fund UNG gained almost 19 percent while the non-leveraged ETF that tracks the ISE-Revere Natural Gas Index 0.84 percent on more than triple the usual volume. So while natural gas futures were the positive story of the day, the bearish GASX was able to gain 3.33 percent on nearly double the usual turnover.

What's Next

Bearish action in the ISE-Revere Natural Gas Index as natural gas prices rise is not a good sign regarding how that benchmark will act when the commodity's rally comes to an end. What that mean is that if the stocks in that index can't rise in unison with the commodity they produce, it is unlikely those names will rise when natural gas futures decline.

That sets up nicely for GASX as the preferred way to be bearish natural gas over futures-based strategies such as DGAZ.

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