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The Death of Commodity ETFs and ETNs?

Several commodity ETFs and ETNs have announced that they are not issuing new shares, which means the only shares that will exist are the ones that exist now.

As a result, several funds are now trading at a premium to their underlying indexes. How did this happen, and when did ETFs and ETNs become closed end funds?

Blame it on the Commodity Futures Trading Commission (CFTC), which announced they were conducting investigations into speculation in the commodities market.

"Speculators" are anybody who isn't using commodities futures to hedge--this would be anyone who was not an oil company, or actively involved in production of commodities.

That leaves hedge funds, and other investors...including commodity ETFs and ETNs.

As a result, several companies behind commodity ETFs and ETNs have gotten spooked.

Look what has happened to the United States Natural Gas Fund . This owns the front-month natural gas contract. Since they announced last week that they would not be issuing new shares, even after the SEC gave them approval to do so, the fund has been trading at a premium to the underlying natural gas contract.

This is like a closed end fund now (which only issues a set number of shares, and can trade at premiums or discounts to their underlying value), and adds significant additional trading risk.

Why? Because you're not just buying natural gas anymore, you're buying natural gas PLUS the scarcity value of the natural gas fund.

This is a good example of the Law of Unintended Consequences. We have a problem: We think there are Dark, Mysterious Forces secretly controlling the universe (and the commodities markets), and these must be investigated. But in the process of doing that, perfectly good products get blown out.

The CFTC needs to clear this up. They need to either issue clear rules, or make it clear that ETFs and ETNs are not part of this...investigation.

I will be discussing this with two ETF experts on Closing Bell today at 3 PM ET.

Halting Share Issuance:

- U.S. Natural Gas Fund

- PowerShares DB Crude Oil Double Long ETN

- iPath DJ-AIG Natural Gas ETN

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Questions? Comments? tradertalk@cnbc.com


  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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