FCG - FCG: A Good Fund Long-Term But No Momentum Short-Term

2023-10-12 15:24:21 ET

Summary

• The First Trust Natural Gas ETF aims to provide investment results that correspond to the price and yield of the ISE-Revere Natural Gas Index.
• The fund's performance has been stagnant since 2022, potentially indicating lower prices ahead.
• The fund offers diversification and inexpensive valuations, making it a compelling long-term investment opportunity in the energy sector.

Natural gas is the one fuel that we have that's affordable, it's scaleable, it can replace coal over time, it can replace imported oil, can create American jobs. - Aubrey McClendon

The First Trust Natural Gas ETF ( FCG ) is an exchange-traded fund with a specific investment objective. It aims to provide investment results that generally correspond to the price and yield, before fees and expenses, of an equity index known as the ISE-Revere Natural Gas™ Index. This index is a mix of exchange-listed companies that derive a significant portion of their revenues from the exploration and production of natural gas. Companies whose natural gas proved reserves do not meet certain requirements are eliminated.

To meet Index eligibility, a stock must also satisfy market capitalization, liquidity, and weighting concentration requirements. All eligible operating companies and Master Limited Partnership stocks are ranked on both liquidity and market capitalization within their segments. The Index is rebalanced on a quarterly basis.

Performance of FCG

Natural gas has over the last 3-4 years been all over the place both in terms of narrative post-Covid and due to the Russia-Ukraine war, as well as on concerns over an energy crisis in Europe. On the surface, one would have expected companies in the space to be in an unrelenting uptrend, but it turns out the fund has largely gone nowhere since 2022. This isn't a knock on the fund, but it does emphasize the point that a strong fundamental argument doesn't necessarily reveal itself in price right away. Technicians might consider this a broad "distribution" pattern which might actually imply lower prices ahead (possible given broader macro risks I keep highlighting).

Top Holdings in FCG

FCG holds 50 positions, with the top 10 holdings making up about 37% of the total fund weight. This provides a decent level of diversification, reducing the outsized risk of any individual stock driving results. Note that these companies broadly are inexpensive, with the fund's own Price-to-Earnings ratio standing at just 4.99. Hard to argue with that from a buy and hold perspective longer-term independent of short-term risks to price.

It's worth noting that this should be classified as more of an SMID (small-mid-cap) allocation. A market environment characterized by narrow breadth isn't a good one for this fund as such environments tend to favor a select number of large-cap stocks (as has been the case this year). Again - not a bad thing, but worth keeping in mind when thinking about where your portfolio's equity market cap is centered.

To the extent that large-cap momentum breaks and broader investor interest flows into commodity plays (not just natural gas but Oil itself), I'd expect this to be a natural beneficiary. For this reason alone, given my broader optimism for a bullish commodity cycle going forward, I think this fund can be a good place to allocate to with a long-term perspective.

Future Outlook

FCG presents a compelling investment opportunity for those interested in the energy sector. The fund's strong long-term prospect and relatively inexpensive valuations do make this compelling. However, it's worth noting that FCG is currently experiencing a lack of momentum in its price action. This can be attributed to various factors, including market volatility and the complex dynamics of the energy sector. As mentioned, I like the space, and the valuation is hard to bear. I just might want to wait to see some price movement to confirm the longer-term argument.

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