Barclays Global Investors announced yesterday that it has temporarily suspended the creation of new shares of the iShares S&P GSCI Commodity-Indexed Trust (GSG). “We’ve taken this temporary step to protect existing investors from being adversely affected by market reaction to proposed new regulations of commodity futures that have created uncertainty,” said Michael Latham, co-CEO of iShares at BGI in a press release.
Approval processes are slightly different for commodity pools such as GSG as compared to traditional open-end funds. Commodity pools require approval from regulators to issue new shares at certain predetermined levels. These rules forced the U.S. Natural Gas Fund (UNG) to request SEC approval to create more shares several times this year as investors began to bet on natural gas, causing the size of the fund to swell. Eventually, the SEC delayed its stamp of approval, causing UNG to look for alternatives, such as over-the-counter swap instruments, to expand. Although UNG ultimately received approval to issue new units, the fund has elected to temporarily suspend new issuances as it waits on the Commodity Futures Trading Commission (CFTC).
In hearings over the last month, the CFTC has weighed implementing regulations that place restrictions on the positions individual funds may hold in a given commodity market. If any exchange-traded products currently have holdings that exceed new limits, they could potentially be forced to sell futures contracts on the open market, perhaps negatively impacting shareholder value.
Proponents of further regulation argue that commodity ETFs have made it easy for speculators to make large bets on certain commodities, contributing to market volatility and price movements that ignore underlying fundamental data. Critics argue that restrictions would be a blow to smaller investors, who, prior to the introduction of commodity ETFs, were unable to easily invest directly in commodities. This side believes that position limits will drive up costs to the funds, which will ultimately be passed on to the investor.
GSG becomes the fourth exchange-traded product to take the cautious approach and cease the issuance of new shares. Along with UNG, the iPath Dow-Jones-AIG Natural Gas ETN (GAZ) and the PowerShares DB Crude Oil Double Long ETN (DXO) have taken similar steps.
As a result of the anticipated regulations (and the subsequent suspensions of new share creations), many commodity ETPs have begun to act more like closed-end funds, trading at a premium to their net asset value as investors pay extra to gain exposure to the underlying commodities. UNG was recently trading at a premium of more than 15%.
Disclosure: No positions at time of writing.