ETFs have been getting a lot of attention over the last several months, mostly from investors who have heard that these products offer numerous advantages over traditional mutual funds and other investment vehicles. But in addition to the love from investors, ETFs are now being scrutinized by another interested party: regulators. Just a week after FINRA announced that it was conducting a data sweep to determine to what extent leveraged ETFs are being used inappropriately, the Commodity Futures Trading Commission (CFTC) announced that it will be holding hearings over the next two months to “ensure the fair, open and efficient functioning of futures markets.”
Specifically, the CFTC is looking into whether “federal speculative limits should be set by the CFTC to all commodities of finite supply” (basically energy commodities such as crude oil, natural gas, etc.). So what does this have to do with ETFs? The call for hearings on the topic is “virtual handwriting on the wall,” notes Dave Nadig at Index Universe. “There will be position limits, just as there have been in agricultural commodities.” Nadig goes on to note that many believe the CFTC’s announcement may have been driven by the U.S. Natural Gas Fund (UNG), which Citigroup recently wrote was responsible for keeping natural gas prices artificially high.
And the impact on ETF investors is already being felt. The SEC has declined to approve the creation of additional shares of UNG, a rare move since the approval process is usually a rubber stamp. UNG, which unlike traditional equity and fixed income ETFs requires approval to create additional shares, has since ceased issuing new shares. Consequently, the supply-demand equation has been thrown off for the fund, and UNG has been trading at a premium to its NAV of nearly 2%.
Disclosure: No positions at time of writing.