Commodity ETFs (exchange traded funds) have been around for long enough that investors are well aware of their presence now, but a newcomer to the market is making some waves. Natural gas ETFs have been on the market for just over a year and have done pretty well so far. In April, 2007, Victoria Bay Asset Management introduced the first natural gas exchange traded fund and in its first year rose over 40%. Victoria Bay manages other energy ETFs and has plans to introduce more in the near future.

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Natural gas exchange traded funds are futures commodities that track the price movements of natural gas and invest in future contracts. Natural gas exchange traded funds can be quite volatile since they are based on predictions, but volatility is not necessarily a bad thing with natural gas ETFs because the trends tend to go the opposite way of crude oil and can positively offset the oil EFTs in your energy portfolio.

Natural gas ETFs are not protected by the Investment Company Act of 1940 because they are securities. Because of this some investors don’t feel safe with natural gas, but others seem to enjoy the fact that they can trade without these government impositions.

One downside to natural gas exchange traded funds is that the fund doesn’t pay into federal taxes, nor do they plan to, and therefore any taxes from earnings or deductions from losses from natural gas ETFs will be the responsibility of the investor. There really is no upside to this except that you get to keep your money and earn interest on it until tax time, rather than the management company earning your interest.

Some analysts warn of the high risk of natural gas exchange traded funds because they are so volatile and because of the chance that some companies might back out on their contracts and there is no way to recover from this due to the lack of liquidity of natural gas futures.

Other experts can only see that natural gas EFTs will continue to grow, slowly but surely they say. This is because of the crazy weather conditions that seem to be unending. With extremely cold winters and excessively hot summers, consumers are using up natural gas as quickly as it can be pumped in to run their heaters and air conditioning. These experts are the same who suggest buying a one year contract to make sure that you hit both seasons.

For those of you who are still considering natural gas ETFs, here are a few things to watch. Weather – extreme heat and cold during the seasons, as well as unusual heat and cold in certain regions. Think about it, if you live in Seattle and are used to mild 75 degree summers, when the temperature hits 95 you will be cranking up the air, if you have air that is. Many people in that region don’t even have air conditioners because they don’t need it, but recently they had a heat wave and the retailers couldn’t keep them in stock. Another thing to watch is government. Congress is trying to pass an energy bill to reduce greenhouse gas emissions and countries around the world are trying to figure out what to do about global warming. Natural gas burns cleaner than other energies and will soon be in even greater demand. Looking for a new commodity ETF? The choice should be simple.

Ryan helps you understand commodity ETFs and shows you how to profit from natural gas ETFs.

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