ETF Expert

Indecision on the part of the Commodities Futures Trading Commission (CTFC) is causing more and more commodity ETFs to have troubles. The list includes, but is not limited to:

• United States Natural Gas Fund (UNG)
• PowerShares DB Oil Fund (DBO)
• PowerShares DB Agriculture Fund (DBC)
• Powershares DB Total Commodity Index Fund (DBC)
• iShares S&P GSCI Commodity Index Trust (GSG)

The problems with Nat Gas (UNG) are well-known, as the provider has stopped issuing shares. This causes UNG to trade at a premium like a closed-end fund with a fixed number of shares. (Note: ETFs are supposed to trade at their underlying net asset value, not at premiums or discounts.)

More recent rulings by the CTFC now cause indigestion for the PowerShares DB line of commodity ETFs. (Review “Commodity ETFs Under Fire… What Now? “)

Yet the latest potential casualty is the iShares S&P GSCI Commodity Index Trust (GSG). The  iShares family explained that it would stop issuing new shares once the fund accumlated 55.9 million in assets, and they are only 6% away from hitting that target.

The implications here is that GSG will become similar to UNG… trading at a premium or discount to underlying net asset value. Ironically, before this iShares announcement, I talked about GSG’s more diverse total commodity approach than DBC’s focused approach; however, both ETFs are in similar boats today.

Granted, the CTFC is making it harder for small investors to get clear, simple, ETF exposure to the commodity space.  Yet this does not mean that commodity ETFs will disappear into the night.

In essence, we’ll be seeing likely changes to the composition of the indexes that commodity funds track. Due to the particular concerns of the CFTC regarding oil and agriculture, funds like DBC and DBO will have to represent different commodity holdings than they do today. Effectively, Powershares will have to sell some “ag” holdings and buy some other types of ag for a wider range of food stuff. DBC will have a much smaller oil/gas component, as well as smaller ag. Meanwhile, DBO’s fate seems the most uncertain, since it is a single commodity facing potential restrictions.

In truth, there still seems to be momentum demand for commodity investing. That may slow if China decides to slow consumption considerably. This is a complete unknown, as the stockpiling seems part of a larger plan.

Another determinant for commodity demand is centered on a likely long term trend – a weakening U.S. dollar. The more it weakens, the more non-dollar currency holders can get more commodity bang for the falling buck.

If you get continued “thirst” out of China, more dollar weakening, soybean surges as well as Canadian/South African mine strikes, you’d get greater demand for commodities across the board.

The truth, however, is that investor shouldn’t expect the gains to occur unabated; the trends appear to be exceptionally long-term ones indeed. And any sign of faltering economic progress in U.S. and foreign economies will likely see pressure on everything but precious metals.

If you hold commodity ETFs, you do not need to sell in a panic. Keep an eye on 50-day and 200-day moving averages. Mind your stop-loss protection. And make sure to stay in touch with potential changes to the composition of the commodity ETF that you hold.

If you’d like to learn more about ETF investing… then tune into ”In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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