BRRRR.…ETFs to Play the Monster Storm and Hideous Cold

Weather forecasters are warning the public this week of an approaching “monster winter storm.” In addition, it appears unseasonably cold weather is likely to descend on much of the Central and Eastern United States.

All that weather drama should add up to more use of natural gas, which will be a benefit to companies in this space and an opportunity for those searching for an investment trend to ride into 2011 with. Here are two ETFs to consider.

There are several natural gas ETFs in the marketplace. Generally these ETFs either own a basket of natural gas companies or they own natural gas futures contracts. I prefer ETFs that own natural gas companies instead of futures because I believe there are less complications involved in the investment experience and returns. Here are two ETFs that deserve a look.

XOP is the SPDR Oil and Natural Gas Exploration & Production ETF and yes I like it because of its exploration focus. Sure, that exploration is both for natural gas and oil so XOP isn’t the purest natural gas play available. However I believe exploration offers such an enhanced growth proposition to investors that this ETF needs to be highlighted. In my view XOP’s exploration focus has the most compelling long term investment upside of the two natural gas related ETFs highlighted in this post.

The next ETF to consider is FCG, the First Trust Natural Gas ETF, which focuses on owning a basket of natural gas companies. This indirect investment approach — not owning the actual commodity —  is similar to XOP. Where it differs from XOP is its sole focus on natural gas companies and neutrality to exploration activities. It will move more closely with natural gas inventory numbers and weather patterns for example. Also, it should be noted FCG charges 60 bps in expense ratio versus XOP at a svelte 35 bps.

Here’s a quick look at the one year performance chart comparing FCG and XOP.

XOP has outperformed recently primarily due to its oil exposure. (as oil prices have risen) Certainly it also could be argued that the growth prospects associated with exploration help this ETF as well. (a growth premium?) FCG has underperformed but posted solid performance even in light of large natural gas inventories. Recent M&A activity and the forecast for colder weather has pushed this ETF upward.

Stay warm over the next week and be sure to watch these ETFs as the markets judge the impact of frigid winter weather across much of the U.S. in the coming days.