Lara Crigger for IndexUniverse caught up with John T. Hyland, chief investment officer and portfolio manager of U.S. Commodity Funds, to talk about the regulatory impact on commodity exchanges, implications of the Saudis’ switch to the Argus Sour Crude Index and the possible move away from U.S.-centric energy ETFs.

Hyland states that the allegations that United States Natural Gas (NYSEArca: UNG) and United States Oil (NYSEArca: USO) caused last year’s extreme volatility in energy prices is unfounded. Critics presumed it was all because of speculators, but it was only opinion. In reality, when oil prices increased, USO’s number of contracts decreased, and vice versa. Investors tended to be net buyers when prices dropped, or the reverse when prices increased. (Natural gas and oil ETFs remain popular).

“Regulators are evolving their thoughts,” says Hyland. If enough regulation persists, investors could move off-exchange and regulators would have to make enough changes to bring back investors.

Saudi Arabia announced its intent to drop the WTI Index in favor of the Argus Sour Crude Index. Hyland sees that the NYMEX and ICE will both contend for the majority of the new index. It is still up in the air which exchange will attract more market makers and traders. U.S. Commodity Funds is still weighing the possible benefits of launching a new ETF based on the index. (Middle East: The next big growth spot?)

The move by the Saudis could also open up the market to additional pricing benchmarks. All that will decide the outcome is the costs associated with the different areas of the world.

Hyland also thinks that ETFs will be become less U.S.-centric and move toward emerging countries, such as China and India. The new ETF products will be assembled and weighed to cater to demand in these other countries.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

The U.S. 12 Month Natural Gas Fund (NYSEArca: UNL) has gotten the green light from regulators to issue about 30 million shares, which will purchase natural gas futures for delivery over the next 12 months. Asjylyn Loder for Bloomberg reports that it will sell the near-month contract as it approaches expiration and replace it with a contract for delivery in 12 months.

The ETF comes from U.S. Commodity Funds LLC, which also manages the popular $3.5-billion U.S. Natural Gas Fund (NYSEArca: UNG) and the $1.96-billion U.S. Oil Fund (NYSEArca: USO). (Natural gas ETF shifts strategy).

UNG differs from UNL in that UNG buys the near-month contract, then sells it each month as it nears expiration and buys the next month.

In terms of natural gas prices and futures, what’s the difference between UNG and UNL? UNL can help mitigate some of the impact of contango, which is when the front-month contract is higher priced than the contracts further out. By using the 12-month approach, the impact of contango is, on average, about two-thirds less than it would be in a fund that simply uses a front-month approach.

Which fund an investor chooses depends on what’s trying to be accomplished. When the markets are in contango, it’s no guarantee that a 12-month fund would do better. On the other hand, it could be beneficial for investors  looking to lessen the impact contango can have. On the other hand, if someone is trading frequently and heavily, there might not be as much concern about contango. As the energy markets shift, it could be more advantageous to be in one fund over another – but it’s no guarantee in the volatile energy space. Many have learned that a single hurricane can change conditions rapidly.

Natural gas futures were wavering today. Below-normal temperatures in the Midwest and Northeast are anticipated to boost natural gas demand, but there’s only been modest growth in industrial production, reports Christine Buurma for Dow Jones Newswires. Until today, many traders had been betting that natural gas prices would fall in the coming months.

For more stories about natural gas, visit our natural gas category.

The spike in investor interest in funds like United States Natural Gas (NYSEArca: UNG), PowerShares DB Commodity Index Fund (NYSEArca: DBC), PowerShares DB Agriculture Fund (NYSEArca: DBA) has resulted in creation halts and strategy reconstruction as the Commodity Futures Trading Commision (CFTC) scrutinizes the industry, writes Don Dion for TheStreet. (More on the CFTC’s commodity limits).

The iPath Dow Jones AIG Platinum TR Sub Index (NYSEArca: PGM) recently had to halt creation in order to remain within position limits. (Regulation hits platinum ETN). And most recently, PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) had to rush to get  approval to create new shares as trading volume suddenly picked up. (Bullish dollar ETF granted new shares).

Traditional ETFs track underlying indexes, which is made possible through the share creation and redemption process. When the creation process is halted, it creates premiums to an ETF’s underlying value. The result is an environment good for shareholders but bad for investors chasing the trend.

As an investor, you should be aware of when an ETF’s share creation has been suspended and understand that if a futures-based ETF runs out of shares, this could happen. If you’re already holding such an ETF, monitor your funds to be sure that all is running smoothly. The risk of holding a fund with suspended share creation is that when normal trading resumes, losses could be incurred as the premium disappears.

For more information on ETF trading, visit our ETF 101 category.

Max Chen contributed to this article.

PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP)

Last week, trading in PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) was halted after it ran out of available shares. Trading was resumed after a filing with the SEC for 100 million additional shares was made.

At the close on Thursday, the fund was trading at a 1.8% premium. As normal trading resumes, the premium should slowly start to dissipate, but it may not happen immediately.

Some funds have limits on how many shares can be created at a time. Heavy trading volume can deplete the supply, in which case the provider files an 8-K with the SEC for more shares. While existing shares of an ETF can be traded while approval is awaited, funds run the risk of trading at a premium to their net asset value (NAV) in the meantime. Approval can take days, weeks or months.

A similar situation was seen with United States Natural Gas (NYSEArca: UNG) when the fund ran out of shares. (What happened?)

For more stories on currency ETFs, visit our category.

One of the most well-known commodity ETF providers, U.S. Commodity Funds, especially felt the wrath of the CFTC when two of their commonly traded funds, United States Natural Gas (NYSEArca: UNG) and United States Oil (NYSEArca: USO) came under the microscope.  The primary reason these funds were looked at was concern that the growing popularity of futures-backed commodity ETFs were causing the volatility in oil and gas prices, leading to a huge surge in prices last year, states Max Frumes of Medill Reports. (How to play commodity ETFs).

After overcoming CFTC regulators, the ETF provider has further expanded its offerings by introducing the United States Brent Oil Fund LP, whose prospectus was filed Sept. 18, and the already-approved United States 12 Month Natural Gas Fund LP.

The two new funds offered by U.S. Commodity Funds are the United States Brent Oil Fund LP, whose prospectus was filed Sept. 18, and the already-approved United States 12 Month Natural Gas Fund LP.

The reason behind this expansion is simply that commodity ETFs have enormous appeal:

• ETFs have simplified commodities investing for the average Joe. Now you don’t have to be a financial giant to capitalize on commodity trends.
• As the U.S. economy still continues to show signs of weakness, inflationary concerns loom over investors’ heads. Commodities are one way to hedge rising prices. (Other ways to hedge against inflation).
• The supply vs. demand picture is favorable. Emerging markets continue to develop and prosper. As they continue to do so, demand for commodities will increase. This could potentially lead to higher prices.
• The U.S. dollar is weak right now. This makes commodities priced in dollars cheaper for overseas investors. (Why commodities could go higher).

For more stories on commodities ETFs, visit our commodities category.

Kevin Grewal contributed to this article.

Copper started the week with a new year high and brokers are uncertain as to the cause, reports Andrea Hotter for The Wall Street Journal. Market fundamentals aren’t supporting any strong price gains at the moment. Copper did receive a boost yesterday after the factory orders report. (Where’s copper going?)

• iPath DJ AIG Copper TR Sub-Idx ETN (NYSEArca: JJC): up 107.8% year-to-date

The U.S. Commodity Futures Trading Commission Commitments of Traders report revealed that speculative long positions have hit a high last seen in the beginning of 2006, which means downside risk is accumulating, and the current commodities market is still bullish. Experts and analysts are divided as to how prices will pan out.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 10% year-to-date

China is the largest holder of U.S. debt, with around $1 trillion, and experts are urging China to diversify its currency holdings unless the country enjoys watching its dollar holdings depreciate in value, remarks Andrew Snyder for Today’s Finance News. Another option for China is to exchange some dollars for commodity holdings as a better way to hold value – also, better for commodities investors gazing at those price upticks.

• PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN): up 7.4% year-to-date

Natural gas inventories are almost topped off  with a little more than 3.7 trillion cubic feet – the total country storage space is 3.9 trillion cubic feet. Snyder believes the natural gas market has ridden the commodities bubble and a correction may soon take place as the spot market corrects for the excess inventory. (How to avoid a bubble).

• United States Natural Gas (NYSEArca: UNG): down 57% year-to-date

Keep in mind that these are just predictions. Watch the markets for what really happens, and act accordingly. When investing in commodities, it’s wise to have an exit strategy that involves a stop-loss points that you can execute when the time comes. (How to protect yourself with a trend-following plan).

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

New regulatory actions in the futures-backed commodities market could pose problems for a variety of popular oil ETFs, including the largest one – United States Oil (NYSEArca: USO), writes Don Dion for TheStreet. Other futures-backed oil ETFs that may be affected by position limits include iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL) and United States 12 Month Oil (NYSEArca: USL). (What does the future hold?).

In the beginning of the year, the CFTC made inquiries about the impact of USO’s impact on the oil market after prices rushed to a record $147.27 in July 2008 before plummeting to near $30 months later. The providers of USO responded by expanding the period in which it rolled its contracts and reducing its position in the underlying benchmark. USO escaped further notice as investor interest turned from oil to other investments, most notably  United States Natural Gas (NYSEArca: UNG).

Recent restructuring of PowerShares DB Commodity Index Tracking (NYSEArca: DBC) portends possible regulatory action that could result in size restrictions on all futures-based oil ETFs. DBC’s managers restructured its oil weightings and also included oil futures contracts traded in London to avoid CFTC restrictions. The managers of UNG have been turning to the over-the-counter swaps markets to get some exposure. We could see more of these types of things as regulations come forward. (What are swaps?)

Assets in long-only commodity ETFs don’t appear to have been dented by the increased regulatory oversight of futures-based funds. At the end of October, assets in the funds stood at nearly $65 billion – a 12% increase from August.

Dion suggests that novice traders steer clear of oil funds until regulatory revisions are set and those who purchase shares should keep the size of the investment in check. Another option to consider for investors leery of futures-based funds are ETFs that hold shares of oil companies. (How to invest in oil using ETFs).

When investing in oil or commodity ETFs, it is important to have a strategy in place. For a more detailed explanation of using a trend following strategy, take a look at The ETF Trend Following Playbook.

For more information on oil, visit our oil category.

Max Chen contributed to this article.

As the commodity market sets up to appeal to investors, there are certain areas of the market to focus in on.

According to Lee Lowell for Investment U, these are three areas poised to move:

Gold. Gold is one area that has not disappointed. Gold has regained the elusive $1,000 per ounce and has motored to all-time highs of more than $1,060 per ounce. The U.S. dollar remains weak, giving weight to the argument that gold still has some shine left yet. Some analysts are even calling for the $2,000 per ounce mark. (What you can do if there’s a bubble).

• SPDR Gold Shares (NYSEArca: GLD): up 16.4% year-to-date

Silver. Silver has rallied back to the $18 per ounce area – a new high for the year, but still $4 per ounce below its all-time high of $22 from February 2008. That being said, it has handily outperformed gold this year. If gold continues to move, silver should follow. Because the silver market is smaller than gold’s, it can be volatile, so watch the trend lines and pay attention to the 200-day moving average. (Can silver benefit from inflationary pressures?)

• iShares Silver Trust (NYSEArca: SLV): up 41.6% year-to-date

The colder winter months lie ahead, making the case for natural gas stronger. Natural gas has finally moved off the lows it has logged since the highs of 2008. After bottoming in price just a few weeks ago, natural gas has rallied back up to levels last seen in early August. Bulls and bears are duking it out, though: the large amount of reserves in natural gas are re-enforcing the bears case for a pullback in this commodity. Bulls think winter will eat up those reserves. (A tale of two natural gas ETFs).

• United States Natural Gas (NYSEArca: UNG): down 55.3% year-to-date

For more stories about commodities, visit our commodity ETF category.

For disclosure, Tom Lydon’s clients own shares of GLD.

As economies around the globe start to recover, the demand for commodities, such as crude oil, gasoline, steel and timber will follow.  Additionally, as emerging nations develop and populations continue to grow, the demand for agricultural-based commodities, such as sugar and cotton, will increase as well.  The problem that lies ahead for investors is accessing some of these commodities, in particular those that hold hard assets. (Why commodity ETFs are a solution).

For more stories on commodities, visit our commodity ETF category.

It turns out, that getting exposure to hard assets with low correlation to other asset classes isn’t as easy as it sounds. Although a host of fairly new exchange-traded products based on commodities are available, the only ETFs backed by physical commodities are in precious metals, reports David Bogoslow of BusinessWeek. This, perhaps could be a reason that many investors turn to commodities ETFs that utilize futures contracts, such as United States Natural Gas Fund (NYSEArca: UNG). (Regulators hurt commodity ETFs?). Be sure to look under the hood when investing in commodity ETFs to know how it’s constructed.

Investors do have the choice to gain exposure to hard asset producers, as well, through such funds as the RVE Hard Assets Producers ETF (NYSEArca: HAP), which is up 35.9% year-to-date. (There are 4 different commodity ETF types – do you know them?)

Kevin Grewal contributed to this article.

Although there are two ETFs that track natural gas, they are going in two directions. The important difference in performance between these two funds can be credited to structure and the ongoing drama unfolding in the futures markets, as well as the regulations that could be coming down on these markets any day now, explains Don Dion for TheStreet. (What it means for investors).

The two funds in question are:

• United States Natural gas (NYSEArca: UNG): down 49.8% year-to-date; UNG recently updated some changes to its strategy, which you can read about here.



• First Trust ISE-Revere Natural Gas (NYSEArca: FCG): up 59.3% year-to-date; FCG tracks the performance of companies involved in the natural gas industry

As a result of forthcoming Commodity Futures Trading Commission (CFTC) regulations,  exchange traded products may continue to see restructurings, closings and share redemptions. (Read all about what’s happened up to this point here).

For more stories about commodity ETFs, visit our commodity ETF category.