Exchange-traded funds touted as a convenient way to obtain market exposure have now become an inconvenient headache.
At the center of the chaos is the U.S. Natural Gas Fund (UNG), which is supposed to follow the price of natural gas. Surging investor demand for UNG forced the fund's general partner to run out of shares. A dramatic public appeal to the SEC yielded a belated approval for an increase in creation units, but what UNG's partners will do next remains to be seen.
Unfortunately, poor planning compounded by a lack of foresight has contributed to UNG's woes. Instead of trading like an ETF with minimal discrepancies between share price and net asset value, UNG trades more like a closed-end fund, with noticeable premiums and discounts.
Even more bothersome is that UNG hasn't been fulfilling its prospectus-described investment goal of following the price of natural gas. The August 17 edition of the Wall Street Journal correctly observed that UNG has fallen 75 percent in value while Nymex front-month natural gas prices were down around 50 percent over the same period.
Commodity regulators have been looking for ways to restrict the trading in futures contracts by commodity pools like UNG. While they have yet to produce any meaningful research to support their case, regulators insist that commodity prices are being needlessly distorted by trading from commodity pools.
For advisors that want accurate exposure to natural gas, they best look elsewhere.
Contango vs. Backwardation
