If I were an exchange-traded fund provider, I might consider this a good a problem to have. While the industry is still in its relative infancy, discussions have already taken place in the regulatory realm claiming that commodity ETFs have attracted too many assets. And in some cases, the regulators are probably right.
Most of the hubbub is focused on United States Natural Gas (UNG), which had to stop issuing shares in July after the Commodities Futures Trading Commission began strictly enforcing its position limit rules across all market participants. Simply put, UNG itself had grown so large so quickly that it became the largest investor in the front-month contracts for natural gas futures. This is problematic because the fund is a passive rules-based instrument that will systematically sell all those contracts when they near expiration in order to purchase the next contract, and all that volume occurs over a five-day window. One could argue that UNG itself is responsible for the prolonged state of contango in natural gas markets. For better or worse, the fund itself is likely impacting market prices in a pronounced manner.
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Paul Justice does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.