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By Patrick Watson

The $3.7 billion U.S. Natural Gas Fund (NYSEARCA:UNG) had to stop issuing new shares earlier this week due to a regulatory snafu. Unfortunately, the fund may be caught in a controversy that is not of its own making.

Like other ETFs, the normal practice is for UNG to issue and redeem shares in order to keep the fund’s trading price aligned with the underlying asset value – in this case natural gas. The SEC authorizes securities issuers to sell shares in predefined quantities. Getting permission to issue new shares is a routine process but can take some time. UNG appears to have been caught off guard by a sudden increase in demand; the fund’s request to sell more shares is still pending.

Another issue is that the Commodity Futures Trading Commission is considering a plan to limit speculation in energy markets. Some people think commodity-based ETFs are creating harmful distortions in certain tangible commodities because they are so easily traded. This may or may not be true, but the prospect of new regulations is also potentially problematic for UNG and similar products. The CFTC review may be causing the SEC to delay action on the UNG request to offer additional shares.

In any case, the upshot of this situation is that the trading price of UNG is likely to deviate from the natural gas market until such time as UNG is able to issue new shares. Today, it is trading at nearly a 2% premium to its indicative value. In effect, UNG is now operating almost like a closed-end fund with a fixed number of shares. Investors should trade with caution – remember what happened when GOE stopped issuing shares.

Disclosure: No position

Source: UNG Stops Issuing New Shares, Now Trading at a Premium