Futures-based commodity exchange traded funds (ETFs) have caught the eyes of the Commodity Futures Trading Commission (CFTC). Many anticipate regulatory restrictions being placed on these ETFs. What will it mean for investors?
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.