3 Commodity ETFs Pose Caution In July
Three commodity exchange traded funds (ETFs) have a tendency to rise or fall in July, indicating both opportunity and risk for investors, according to Investopedia. Two of the ETFs have a strong bearish bias while one has a long-term historical tendency to rally, although in recent years it has been slammed lower.
Investors are advised to use seasonality in conjunction with other fundamental or technical criteria, as it only shows what happened in the past and not necessarily what will happen this July. It is important to consider factors like targets, stop-losses and entries before trading the ETFs based on seasonality.
United Natural Gas Fund (UNG)
The United States Natural Gas (UNG) fund, an ETF designed to track in percentage terms the movements of natural gas prices, has struggled in July over the last four years. UNG’s price has lost 5.8% on average and never closed the month higher than it opened. Even in 2016, when the price rallied, natural gas prices struggled through July and August.
UNG’s investment objective is for the daily changes in percentage terms of its shares’ net asset value to reflect the daily changes in percentage terms of the natural gas price delivered at the Henry Hub, La., as measured by the daily changes in the benchmark futures contract minus expenses.
The fund offers commodity exposure without using a commodity futures account. It offers equity-like features such as intra-day pricing and market, limit and stop orders.
Over the last 19 years, natural gas futures have dropped in July 68% of the time and lost 2.9% on average. The fund has been struggling in 2017, but recently, it bounced off support near $6.50. The seasonality factor, however, points to a re-test of the support area.
In April, natural gas futures rose 2% when a report indicated natural gas supply growth already peaked. Inventories rose by 2 billion cubic feet following an April draw of 43 billion cubic feet, which fell far short of expectations that supply would increase by 7 billion cubic feet.
Natural gas futures increased 0.7% following the news.
Natural gas reached its 52-week low in April 2016 of $2.64, followed by increased volatility due to unseasonably warm weather that crimped its bull run in early 2017. From mid-February to April 2017, natural gas reversed course and stayed 8.8% up from the year’s start.
UNG did not follow suit, however, rising only 0.9% and was down 16% on the year. UNG has witnessed a decline in its net asset value due to transaction and borrowing costs despite its underlying asset gaining in value.
iPath Bloomberg Sugar ETN (SGG)
The iPath Bloomberg Sugar ETN (SGG), designed to provide exposure to the Bloomberg Sugar Subindex Total Return, has lost value every July for the last three years, dropping an average of 9.7%. While this strikes of bearishness, it is actually a recent phenomenon. The outlook for July improves in reviewing the results over four additional years.
The price over the last nine years has increased in July 67% of the time, gaining 2.9% on average. There have been some big loss years of late, but there were bigger positive years previously.
Sugar futures contracts have increased 68% of the time over the last 19 years, rising 4.8% on average.
The Sugar ETN suffers a downtrend at the present time, having dropped steadily since March. $25 to $24 to is a plausible support area, since that is where SGG bottomed in 2015.
ETNs are riskier than ordinary unsecured debt securities and offer no principal protection. The ETNs are unsecured debt obligations of Barclays Bank PLC, the issuer, and are not, directly or indirectly, guaranteed by any third party, according to Barclays Bank PLC.
Any payment made on the ETNs, including at maturity or upon redemption, relies on Barclays Bank PLC’s ability to satisfy obligations as they come due.
The index reflects the returns potentially available through an unleveraged investment in the futures contracts on sugar. It currently consists of one futures contract on sugar that is included in the Bloomberg Commodity Index Total Return.
Owning ETNs is not the same as owning interests in the commodities futures contracts comprising the index or a security directly tied to the index performance.
Most of the world’s supply of sugar is not traded on the open market. It is also highly subsidized in its countries of origin, which can make it impossible to determine its true supply and demand. All governments, to some extent, intervene with the growth and production of sugar in their country.
Teucrium Corn ETF (CORN)
The Teucrium Corn ETF (CORN), which provides investors unleveraged, direct exposure to corn without the need for a futures account, has also had rough Julys as of late. It has fallen every July in the past four years, posting average declines of 8.9%.
CORN was created to minimize the effects of rolling contracts by not investing in front-month (spot) futures contracts, thereby limiting the number of contract rolls every year.
The futures contract offers a longer historical precedent as the ETF has existed for only eight years. Over the last 19 years, corn futures have increased only 32% of the time in July, shedding 3.4% on average.
The ETF has ranged since mid-2016. At the beginning of June, the price tumbled from the top of the range.
The ETF currently trades around $18.50, which could represent a support area according to the range.
If selling continues as history indicates, the next fall could take the price beneath $17.68, the August 2016 low.
Corn futures, which are traded on the Chicago Board of Trade, trade according to loose seasonal patterns. This is mainly on account of the seasonal availability of corn in the cash market. While these trends may not always work alone, they often work in conjunction with other fundamental and technical indicators.
Most farmers and professional grain traders know these trends. Farmers use them to initiate hedge positions and as a guide as to when cash corn should be sold. Traders use the knowledge to back up an existing indicator.
Most seasonal charts indicate the corn market is at its weakest prior to and during the harvest, which is generally between September and November, when North American farmers harvest corn and deliver it to local elevators. The lows occur because of the supply of cash corn that gets thrown into the market. High supplies, as with any market, equate to low prices.
Most traders use these indicators to confirm another signal, be it technical or fundamental. They should not trade using seasonal trends alone, since outside market forces can have a major impact.