Two months ago it was a carnal sin to suggest that certain exchange-traded funds or notes which track commodities would start trading more like a closed-end fund based upon supply and demand moves in shares caused by in-flows and out-flows of orders rather than solely by the direction of the prices of underlying commodities. It has been our ongoing prediction that many commodity ETF/ETN products (and maybe some leveraged products as well) will become more like closed-end funds. Yet here under new regulations that have not even become gospel, we have seen new share issuances either denied or withdrawn from some of these ETF or ETN products. And we are getting to see a premium in pricing to boot. The United States Natural Gas Fund LP (NYSE: UNG) is the most classic example out there. This ETN was at a 15% to 16% premium to the actual gas futures as investors are choosing to pay higher prices just for the ability to get exposure in the portfolio in case these prices rise. The UNG has already confirmed that no new shares would be issued currently, and it is now so large that it controls closed to 20% of the benchmark natural gas contracts. Limitations of this sort will drive a free-market theorist nuts, but the other reality is that this can also create large directional price moves that have nothing at all to do with fundamentals.
It turns out that the PowerShares DB Oil Fund (NYSE: DBO) traded about 0.3% higher than its actual value in crude futures late last week, and limits to shares could exaggerate premiums and discounts. And the PowerShares DB Crude Oil Double Long Exchange-Trade Note (NYSE: DXO) has also suspended issuing new shares. Barclays has also said that it would, at least temporarily, suspend new shares from being issued in its natural gas ETN called the iPath Dow Jones-AIG Natural Gas Subindex Total Return Exchange-Traded Notes (NYSE: GAZ).
Barclays also said that it would stop issuing new shares of the iShares S&P GSCI Commodity Index Trust (NYSE: GSG) once the outstanding amount reached 55.9 million shares. If our data is accurate on the latest count, that looks to stand at roughly 52 million shares. This is a semi-diversified product that tracks about 24 different commodities in energy, agriculture, industrial metals, prcious metals and livestock. It is energy dominant, but this was a much more diversified fund that decided to limit its size. This one also has traded at a premium to its underlying value.
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