There are two major types of natural gas funds, although each type can be divided into subcategories. The first main category of natural gas funds is made up of mutual funds that invest in natural gas stocks. The second main category of natural gas funds consists of exchange-traded funds (ETFs). An ETF is a basket of stocks that behaves much like an individual stock. It can be bought and sold on the market whenever its host stock exchange is open.
Mutual funds are investment vehicles with exposure to a diverse group of stocks. Mutual funds that are natural gas funds are typically composed of a collection of natural gas stocks. They can also contain exposure to financial contracts that track the futures price of natural gas.
If a natural gas mutual fund is an index fund, its managers seek results that correspond to the price of an index of stocks of companies involved in natural gas. Natural gas index funds do not attempt to outperform the equities market. They are concerned only with tracking the natural gas sector of the market.
Regular mutual funds are more actively managed than index funds. Some natural gas mutual funds invest in natural gas futures. Others invest directly in the natural gas market, seeking to capitalize on fluctuations in natural gas prices. The managers of some natural gas mutual funds aggressively try to beat the market by investing in a variety of companies that explore natural gas or provide services related to the industry.
The primary advantage of mutual funds is that they provide exposure to a diverse group of equities. A disadvantage is that they cannot be traded in real time the way an individual stock can. It also can be difficult to find out exactly which stocks are in a mutual fund, because fund companies often release that information only at the end of a quarter.
ETFs, the second major type of natural gas funds, are like index funds in that they are passively managed and track a particular sector of the industry. An advantage of ETFs is their flexibility. Like individual stocks, they can be traded in real time and they experience price changes throughout the day. Many natural gas funds are available in the form of ETFs, including funds that invest in drillers, funds that invest in suppliers, and funds that short — or bet against — the natural gas market.