HNU is also known as the "Horizons BetaPro NYMEX Natural Gas Bull PLUS ETF". This ETF is designed to capture double the daily movements of natural gas. I'm not going to get into the details of how exactly they produce these double leveraged results - there are plenty of articles which describe the method of achieving this double results. What is essential to know here is that the double return is achieved on a DAILY basis, not in the long-term. In the long-term the returns of HNU can vary greatly with what the price of the underlying natural gas is tracing.
Let's look at a recent price of natural gas commodity:
See the pattern? The supports are clearly visible at around the $3.30 area, once at the end of April and once mid-July. Now let's take a look at a chart of HNU:
Does this chart look the same? You can clearly see a divergence of price at the end of June where HNU breaks lower at the point where there is support in the underlying commodity.
This ETF has traded much lower than its $5.50 support line, while natural gas is still above its May 2009 support line.
Given all this, how can a swing trader do technical analysis on an ETF where the price is un-correlated to the underlying on a time horizon of more than one day!
Leveraged ETF usually contain the words plus, double, triple, or ultra in the title. Be careful of this kind of leveraged ETFs if you planned timeline for the trade is longer than a day.
Do not hold this position for more than a week. This is the most volitile commodity on the planet. More importantly this fund is caught up in massive contango due its cousin UNG, which dominates the market holding 1/3 of all front month natural gas contracts. What UNG does, similar to HNU, is it rolls over the September natural gas contract with the October natural gas contract on a set date (5 day rollover August 13 to August 18th). Given the funds domination of the market, the pros are shorting the front month and longing the next month exaserbating the contango as UNG must roll over contracts.
ReplyDeleteIn simple english. The September contract trades at 3.10, the October contract trades at 3.50. The contango is 40 cents. What the fund does is it rolls the 3.10 contract into the 3.50 contract. So at the end of the month when the september expires, you are left with the 3.50 contract. What has happened is the price of the forward contract has collapsed month over month, so despite the commodity performing poorly, you must contend with the rollover effect. Plus going forward the contango effect is massive. It gets much much worse.
Be carefull with this fund, its ok to trade do not own long term.
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