A Split Decision For This ETF's Holdings

Thanks in large part to rebounding energy commodities, namely oil, the once downtrodden and maligned First Trust ISE Revere Natural Gas (ETF) FCG is up 5.7 percent year-to-date. That is an especially performance showing when noting the United States Natural Gas Fund, LP UNG is off nearly 19 percent and when recalling that FCG often lags its futures-based peer.

FCG holds 39 stocks, and in order for those companies to qualify for admission to the ISE-Revere Natural Gas Index (FCG's underlying benchmark), they must “derive a substantial portion of their revenues from the exploration and production of natural gas,” according to First Trust.

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Honing In On FCG

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.

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.

However, many of FCG's member firms have significant oil exposure, such as top 10 holdings Hess Corp. HES, Anadarko Petroleum Corporation APC and Marathon Oil Corporation MRO. What that means is the ETF can benefit from rising oil prices, as evidenced by its recent rally, but natural gas exposure remains a concern.

Other Concerns

“Some midstream projects could be at risk if pricing does not improve as producers remain under financial pressure and are hesitant to commit to projects while end-users remain able to secure supply and pipeline capacity at reasonable prices,” said Fitch Ratings in a recent note. “Ongoing pressure on gas prices could lead to reduced production volumes, particularly in less economic regions. Lower production volumes and continued weakness in prices could result in natural gas projects becoming delayed or outright canceled.”

FCG's natural exposure is telling on another level: The ETF's lagging more traditional equity-based energy ETFs, which are usually more heavily allocated to oil companies. For example, the Energy Select Sector SPDR (ETF) XLE is topping FCG by 500 basis points this year.

Also pressuring natural gas prices are still elevated production levels.

“US production has not slowed; in fact, it has ramped up despite weak natural gas prices and declining rig counts. The latest natural gas production data available from the EIA are from January 2016, with production at 91.1 bcf/day, a 2 percent increase over production in January 2015 and an 8.9 percent increase from January 2014. These increases have occurred despite natural gas price weakness over the same time period. Natural gas averaged $2.23 per million btu in January 2016, down from $2.93 in January 2015 and $4.55 in January 2014,” said Fitch.