US commodity ETFs blow hot and cold

Increasing attention has turned to commodity exchange traded funds (ETF) in the US this month as part of the wider investigation by the CFTC into the need for tighter oversight of energy futures markets. Rachel Morison investigates

On September 1, Deutsche Bank announced it was liquidating its PowerShares DB Crude Oil Double Long Exchange Traded Notes (DXO) due to regulatory issues with the New York Stock Exchange (NYSE.) This move followed a similar one by Barclays Capital who stopped issuing new shares in its iPath Dow Jones-AIG Natural Gas ETN (GAZ) in August.
“The DXO became too big for Deutsche Bank to manage and we have also seen this with Barclays Capital and the Barcap GAZ ETF,” says Olivier Jakob managing director of market research company Petromatrix. “The limits have not been set yet by the CFTC and it is becoming an emerging trend amongst large commodity ETFs to announce that they are doing things because of ‘regulatory’ issues,” Jakob says.
This month has also seen the controversial US natural gas fund (UNG) announce that it will recommence issuing new shares on September 28th following a temporary suspension in August.
“The UNG initially said it decided to stop issuing shares because they had issues with the CFTC rules and a few weeks later when the ETF was trading at a 20% premium to the underlying, they decided they didn’t have issues with the CFTC and began issuing shares,” says Jakob. “The 20% premium has shrunk a lot since the UNG announcement because arbitragers will be selling the UNG and buying the futures to reduce that spread. It creates trading opportunities and the trader that knows a little bit beforehand certainly has some advantage,” he adds.
Matthew Simmons, chairman and chief executive of energy investment bank Simmons and Company says that tougher regulation is needed and soon. “We need the post-depression Glass-Steagall Act to be put back in place,” he says. I don’t think there is any need for ETFs in the market place - there is no transparency and we shouldn’t have investment vehicles where there is no transparency.”