What Lies Ahead For Commodity ETFs

The Commodity Futures Trading Commission (CFTC) announced that it will be holding hearings to determine if limits on speculative positions in energy futures markets should be imposed. What could be the impact on commodity exchange traded funds (ETFs)?

Of the energy futures in questions, the CFTC is primarily putting its focus on crude oil, heating oil, natural gas and gasoline. The reason behind this is because of the recent stir up by some stating that speculators are to blame for the volatility in commodities over the last few years, states Eric Fox of Brittain Capital Management LLC for Investopedia.

Any new rules could impact ETFs that track an underlying commodity, such as United States Oil Fund (USO), United States Natural Gas (UNG) and PowerShares DB Gold (DGL), to name just a few.

Such commodity ETFs are not governed by the Investment Company Act of 1940 and are considered commodity pools.  Although many believe that these ETFs are a  straightforward play on commodities that may physically hold the commodity in question,  they are in fact composed of futures contracts and seek to match the return of the benchmark commodity.

The way that these ETFs work is that the managers of the funds issue creation baskets in increments of a certain number of units and offer them for sale to authorized purchasers, which are generally large brokerage firms.  However, sometimes the fund can hit a limit of units and “freeze” trading, in the case of the natural gas ETF.

This regulation is being imposed at a time when the Obama administration is trying to increase transparency and regulation of the financial markets.

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