"UNG invests in front-month natural gas futures contracts and rolls its position forward to the next nearest to expiration contract on a monthly basis. The supply glut ... has depressed the price of spot gas, keeping the market in a persistent state of contango. Over time, this has forced UNG to replace expiring contracts with more expensive, later-dated contracts, creating a string of losses," according to Morningstar analyst Abraham Bailin.
In an interesting side note, the iPath DJ-UBS Natural Gas TR Sub-Idx ETN (GAZ), a futures-based exchange-traded note, has been following its own trajectory. The ETN stopped issuing new shares, which made the fund act more like a closed-end fund. Consequently, its premium has skyrocketed, resulting in divergences between its price and indicative net asset value--it was trading at a premium of up to 100% late April. While natural gas prices were dropping, GAZ was actually trading higher. After the recent rally in natural gas prices, GAZ has actually declined.
Instead of getting trapped in a contango futures market, natural gas ETF investors could take the equities approach and follow the growing energy sector.