Commodity ETFs Brace for CFTC Regulations

August 31, 2009 at 11:00 am by Tom Lydon

Commodity ETFs Increased regulation has been proposed for the commodity markets for the protection of individual investors and the stability of the markets. But could exchange traded fund (ETF) investors actually pay a higher price in the end?

ETFs and exchange traded notes (ETNs) have long been considered low cost, liquid tools for trading to gain exposure to the commodities market. But now many worry that the Commodity Futures Trading Commission (CFTC) has assumed that the large amounts of capital from retail investors pouring into such ETFs has led to a distorted marketplace, explains David Bogoslaw for BusinessWeek.

Thus far, most of the attention has been focused on certain energy and agricultural products that hold futures contracts. Several funds have stopped issuing new shares in anticipation of CFTC limits. That has been enough to cause the funds to drift from their net asset values (NAVs), putting a dent in their appeal.

Position limits are one of the major regulations involved, and they help support the integrity of the market, according to a CFTC spokesman. Many ETF investors who are in ETF products in the commodity realm say they are less inclined to use them if the limits are enforced. How this plays out remains to be seen.

Meanwhile, natural gas prices have plunged to a seven-year low, reports Liz Kay for the Baltimore Sun. The prices are being sent lower by vast supplies and a weak economy, but many believe that the prices will head up again as the economy recovers.

As of Wednesday, Barclays Global Investors announced they are not planning on scaling back their ETFs focused on precious metals, although U.S. regulators are planning on imposing limits. Frank Tang for Reuters reports that the precious metals trusts would not be affected by limits on futures trading because they own physical gold and silver bullion held by a custodian on behalf of the trusts.