How to invest in a natural-gas boom

  @Money October 2, 2012: 5:44 AM ET
Natural gas pipes

While betting on natural gas prices is too speculative for individual long-term investors, investing in utilities, industrial energy users, and drilling-equipment manufacturers makes sense.

(Money Magazine)

A funny thing happened on the way to the green energy revolution: Fossil fuels came charging back into fashion.

Slow economic growth that tamed enthusiasm for alternative energy, plus Canada's success pumping oil out of the sand, made the U.S. take another look below its feet. What's there is natural gas. Lots of it.

The new economics

We've known for a while about huge gas deposits encased in shale. In the past five years, though, huge advances in horizontal drilling -- going deep into shale, and then turning and drilling sideways -- combined with hydraulic fracturing ("fracking") have changed the economics of gas recovery.

And while the media have focused on the potential environmental impact of fracking, as the technology improves, even more gas will become accessible.

Related: Gas at $4? Time to invest in oil

These new discoveries have driven natural-gas prices way down, to an average of $2.43 per million British thermal units in the first half of this year, from nearly $13 in June 2008.

Stephen Leeb, an energy expert and research chairman of Leeb Group, a financial newsletter publisher, expects the price to at least double over the next few years, but commodities future markets are too speculative a place to play for individual long-term investors.

Follow the pipeline

Rather, think about the beneficiaries of a gas boom: utilities that buy what is, even at double today's price, a cheap, clean way to generate electricity (especially compared with coal); industrial users of energy; and pipeline and drilling-equipment makers.

Leeb recommends the FBR Gas Utility Index Investors Fund (GASFX), an exchange-traded fund with a five-year annualized return of 8.7% and a 2.4% dividend yield. It adjusts holdings based on how much of a company's business is connected to natural gas, so you're not simply investing in energy firms that have a natural-gas play.

Related: Tips for investing in stocks

Don't let today's low gas prices scare you, says Leeb. The fund is largely made up of distribution firms, which benefit from rising demand. "This is a conservative way to play the gas boom," he adds. The biggest holding, Kinder-Morgan, is a pipeline firm.

Dow CEO: U.S. can be an energy exporter

Low prices are unquestionably a boon to industrial companies, though they also need a low dollar and an improved global economy to thrive. Those are big "ifs," but optimists can modestly increase exposure to industrials via an ETF.

Send your investing questions to the Help Desk.

Jim Awad of Zephyr Management recommends Industrial Select Sector SPDR (XLI). "It's weighted toward aerospace, defense, and transportation," says Awad. "If you think a renaissance in U.S. energy will make U.S. manufacturers and exporters more profitable, this is the perfect vehicle."

XLI's five-year annualized return is just 1.5%, owing to the 2008-09 recession; its three-year annualized return is a more energetic 20%. To top of page

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