This is from the Sentiment’s Edge by Jason Goepfert. We also discussed a pair trade of natural gas vs oil using ETFs. Note, these ETFs do not track the cash commodities because they buy futures so when they roll to the next month the fund loses money if the futures are in contango (upwardly sloping futures curve):
Excellent article from the Financial Times today reiterating a problem with open-ended exchange-traded funds like UNG (Natural Gas ETF) or USO (Crude Oil ETF), that trade futures contracts.
Traders are all atwitter about record volume in UNG recently. But there’s probably an underlying reason, and it’s not necessarily that suddenly everyone’s getting in on the next bull market.
At issue currently is the rampant growth of the UNG, the natural gas positions of which have doubled since last month’s roll. This growth, by the way, is eerily similar to that experienced by the ETF’s sister fund, the USO, earlier this year.
In the UNG’s case, however, the growth has been so large that in order to avoid a regulatory clampdown on its futures positions the fund managers have been forced into the world of over-the-counter swaps. Accordingly, the fund’s swap positions are now 2.6 times larger than its future ones.
To give some perspective, if the fund was to put all that money into the futures market, Jakob calculates it would be equal to occupying 78 per cent of open interest in the July Nymex contract. Meanwhile, the holding of large swap positions goes against the fund’s mandate as outlined in its prospectus.
They went on to show how rising positions in UNG is coinciding with increasing contango in the futures.
A similar thing happened with USO and Crude Oil.
Let me be perfectly frank…if you’re too lazy to read and understand what you’re trading, then you deserve to lose whatever money you “invest” in vehicles like these.
Source:
The Problem With Commodity ETFs
Financial Times, June 11, 2009
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