How Will CFTC Hearings Impact 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.

For more stories on commodities, visit our commodities category.

Kevin Grewal contributed to this article.

Comments

[DeltaCharlie:]

It wasn't too long ago (in 2008) when the CFTC said in no uncertain terms that the Oil price spikes to $147 were not the doing of speculators. They issued a report saying exactly that on their website. How is it credible now that they want to hold hearings to impose limits on speculators trading commodities. I think this is an absolute joke.

The fact there are speculators is the only reason that many of the producers are still in business. Take the liquidity away, you may very well get low priced oil/natgas, but you're destroying the companies that supply the market and reduce investment for future demand.

The problem that seems to consistently emanating from this Obama administration is its short-sightedness on how their policies are harming the free market. Big government in typical fashion blames everybody except themselves for the mess that we're in.

I foresee the unintended consequence of these regulatory policies hurting US companies when investors who provide liquidity to the markets start investing overseas into BRIC and other EMs. When that happens, they'll wish they'd never blamed the so-called speculators.

Jul 16 02:38 AM

[mwfall:]

pretty lame article. you should have named it 'here's a tiny bit about
commodity ETFs that you probably already know any way"

Jul 18 01:58 AM

[Tom Lydon:]

For more commodity articles that cover exactly how they work, problems like contango and how they are taxed,visit our commodities category. Here is the link.
www.etftrends.com/cate.../

Jul 21 08:02 PM