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By Jeremy Glaser | 08-26-2009 02:19 AM

A Balancing Act For Commodity ETFs

With commodity position limits being strongly enforced, ETF analyst Bradley Kay thinks that investors in commodity ETFs should shy away from larger funds and look to smaller, nimbler ones.

Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. Commodity Exchange Traded Funds, or ETFs, have been in the news recently as the Senate has pointed out that they think some of these long-only indexed commodity ETFs could be responsible for some manipulation in the futures markets of several commodities. Here to discuss this with me is ETF analyst Bradley Kay. Thanks me for joining me, Bradley.

Bradley Kay: Always a pleasure.

Glaser: Do you think it's possible that some of these commodity ETFs have been responsible for some manipulation or some mispricings in futures markets?

Kay: I'd say that they've certainly changed some of the pricing in the futures markets. I wouldn't go outright to call them manipulation. In fact, to some extent I feel that part of the problem for typical investors is that largest of these funds are themselves getting manipulated. Indexes by their nature have to be very transparent. You have to know where they're trading, when they're trading. And the problem is, is that that can get taken advantage of by other market participants.

Generally this doesn't matter very much, and you see it in, say, the S&P 500 where funds will try and buy into a stock before the S&P 500 does. But it's only a few percentage points, because the equity market is very deep, and it only covers a very small holding of the fund.

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