The official-sounding but totally private United States Commodity Funds has launched another ETF based on natural gas prices. United States 12 Month Natural Gas Fund (UNL) started trading Wednesday (11/18/09). It joins the firm’s previous offering, United States Natural Gas Fund (UNG) in an attempt to offer small investors an easy way to participate in the natural gas market.

The new fund is a response to certain structural problems of UNG that resulted in dramatic underperformance relative to its benchmark, particularly in the last few months. This chart of UNG vs. natural gas futures tells the story well. The issue is that futures contracts expire and periodically have to be “rolled” to a later-dated contract. This is exacerbated when a market is in “contango,” which means prices farther out in the future are much higher than they are at present. This has been the case in natural gas lately. A secondary problem is that UNG must buy an enormous volume of futures contracts, and regulators don’t like to see such concentration in theoretically “public” markets.

UNL seeks to solve this problem by changing the bogey to an average of futures contracts spanning the next year, hence the “12 Month” part of its name. This should help the problem but will by no means eliminate it. The underlying conceptual flaws of UNG are still present in UNL; the added diversification simply means they will be less apparent at any given asset level.