The commodity ETFs rely on the derivatives market to synthetically create a security that tracks the underlying asset. And so there’s fear that fresh derivatives regulation could hamper their ability to market these products.
So we have it that the U.S. Natural Gas Fund won’t be issuing new units for its ETF “UNG” despite the fact that it has regulatory approval to do so. As a result, shares of UNG may be trading at a 40% 40 cent premium to the value of their holdings due to lack of supply. Not that you’s easily notice this premium from the downward sloping stock chart of UNG.
A potential shut-down of UNG could have a significant effect on the natural gas futures market:
WSJ: “We just don’t feel it’s prudent to accept [new unit] creations and then attempt to use the money to purchase more natural-gas products when we have a strong belief that the CFTC is going to mandate limits that would either cap us or force us to reduce our holdings,”
The U.S. Natural Gas Fund is one of the largest buyers of natural-gas futures on the New York Mercantile Exchange, and it has grown exponentially in recent months as investors bet on rising gas prices. The fund’s size has raised concern about whether it is causing volatility in natural-gas futures.
That being said, even with the derivative market as it is, many ETFs have failed to track the underlying commodity, so other than the companies that make money marketing these things, it’s not clear that this particular by-product of the regulation would be all that harmful.
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