Always "joys and pains" for investors, exchange traded products (ETPs) on natural gas gave the best performance among European replicators in March. As emerges from an analysis by Lee Davidson, ETF analyst at Morningstar Europe, the rise was between 14 and 18%, depending on the underlying reference index.
Contango effect
The price of natural gas has soared rapidly (+95%) in the last year; however futures only partially participated in this rise, since the curve was in contango. In this regard, it should be remembered that the use of derivatives means that, in order to maintain exposure and avoid the physical delivery of the commodity, the existing contract must be replaced before expiry. This operation is called in technical jargon rolling. In the case of natural gas, the new futures were more expensive than the previous ones and therefore led to a loss (contango effect). For this reason futures, measured by the Dj Ubs Natural gas index, rose "only" by 26%.
In March, the rise in the price of raw materials was mainly attributable to the cold which increased the demand for heating of homes in the United States, especially in New York and Chicago. However, as Davidson explains, the reasons for the price increases in recent years are long-term and concern the discovery of a new technology, "fracking", which consists in the hydraulic fracturing of rocks and clays, which has made extraction more efficient and less expensive. Furthermore, the development of vast reserves in the United States has prompted companies to increase production. While natural gas is at a discount to oil, investors shouldn't underestimate the impact of increased supply on prices.
Leverage in Piazza Affari
Borsa Italiana statistics show that ETCs on this natural resource have been among the most traded in the last year, in particular it has been the daily leveraged natural gas ETFs, which gives leveraged exposure, amplifying upswings (and downs too). As Morningstar analysts explain, the biggest concern for investors in these instruments is contango.
Black jersey, volatility
On the other hand, the biggest declines in March were recorded among ETPs specialized on volatility, with declines between 9 and 17%. The main reason is the rally of the stock exchanges, as in the bullish phases the fluctuations of the prices are attenuated. The benchmark index is the Vix, which seeks to capture changes in expected future volatility. This indicator is also used as a proxy to measure market uncertainty. “When investors are fearful, they demand higher returns and pay less for assets in the present,” Davidson says. “This relationship between volatility and equity prices makes vehicles that track the Vix a good portfolio diversification tool.”
Various ETPs on volatility indices are listed on the Italian Stock Exchange, promoted by Lyxor, to which the Dynamic short ETF has recently been added, which allows exposure to a "short" volatility index, transforming the counting that characterizes it from cost into revenue, and the Dynamic long one, which on the basis of a quantitative algorithm takes position on volatility or liquidity.
