The elimination of ETFs & ETNs

[Camtender]

http://www.moneyandmarkets.com/commo...ington-3-35395

So you might be surprised to learn that regulators are well on the way to eliminating your ability to invest in commodities with ETFs/ETNs.
Why? Several reasons, but for the most part it is a bureaucratic turf war. The Commodity Futures Trading Commission (CFTC) has long had a monopoly on the regulation of these markets. They (and their allies in Congress) would like to keep it that way.

ETFs and ETNs fall under the jurisdiction of the Securities and Exchange Commission (SEC). The CFTC can control some aspects of their activity, but on most issues the SEC is in charge.

Recent actions by the CFTC are causing some commodity ETF and ETN sponsors to reconsider whether this business has a long-term future. By enforcing “position limits” against the funds, the CFTC can effectively cap their size — which can make them less profitable for the sponsors and less liquid for investors.

The boogeyman is “speculation,” which some people think got out of hand when commodity prices shot so high in 2007-2008. I think they’re barking up the wrong tree. Financial markets are all about speculation! It’s not a bad thing, as long as the process is fair to all sides.
The struggle over these issues is ongoing. No one knows when — or how — it will be resolved. Some sponsors aren’t waiting. Just last week, Deutsche Bank announced it would liquidate its PowerShares DB Crude Oil Double Long ETN (DXO) as of yesterday (September 9). Investors who still own DXO today will receive cash equal to the net asset value as the shares have stopped trading.

Financial markets are all about speculation.

Other funds like United States Natural Gas Fund (UNG) have stopped issuing new shares, allowing their share price to deviate from the actual value. This means new buyers are paying more than they should.
Sounds like a mess, doesn’t it? You are exactly right. I am saddened to see these innovative new funds threatened for no good reason. I want small investors to have choices, and I don’t want the commodity markets to be dominated by a small number of powerful institutions.

If you’re thinking about buying a commodity-related ETF or ETN, I highly suggest you do some homework first. Make sure that you’ll be able to stay in the fund you pick long enough to achieve your objectives.
I wish I could be more specific, but keep in mind we’re dealing with the U.S. government! It’s very hard to predict what they will do. Investors deserve better — so cross your fingers that the regulators come to their senses soon.

[globaleconomicollaps]

Re: The elimination of ETFs & ETNs

Does this apply to companies like CEF?

It strikes me that any company can buy gold, oil, sugar or what have you and become an "ETF" just by having more money in the commodity than any other asset. What exactly is an ETF?

I just had a thought! I work for a "Computer ETF". My company has no tangible assets except for computers. We issue stock and continually buy more ( and more and more !) computers and keep them in a dust free air conditioned environment under 24/7 guard.

... and our stock tracks the value of used computers perfectly :-(

[ddk]

Re: The elimination of ETFs & ETNs

I think you're right -- CEF would be safer as a closed-end fund. Although if there were limits set to what holding companies could hold it could be affected....except for the fact that it's Canadian.

Arggh. Dunno.

[jk]

Re: The elimination of ETFs & ETNs

cef and gtu are canadian based closed-end funds. they hold annually audited physical metal, as well as a little cash. as with all closed-end funds, they may trade at a premium or a discount [not lately] to net asset value. this distinguishes them from tracking funds which do their best to track a commodity, either by holding futures contracts or holding physical commodities. since cef and gtu are canadian, they trade on a canadian exchange, as well as in the u.s.

when the premium gets too big, cef and gtu tend to issue more shares, thus knocking down the premium and increasing the size of the fund. in contrast, the futues holding commodity tracking etf's, and the [we hope] physical holding tracking etf's, such as gld and slv, may issue or take back baskets of shares on a daily basis. it is this basket buying/selling process that arbitrages away deviation in etf price from the price of the underlying commodity or commodities.

position limits and limited numbers of shares for futures-holding etf's will loosen their link to the underlying commodity or commodities. they will trade at premia and discounts. when commodities are rising, their premia will increase. when commodities are down, they will tend to go to a discount.

[pianodoctor]

Re: The elimination of ETFs & ETNs

There are various pro and con arguments as to whether "speculators" caused the oil price spike. Mostly they leave me uncertain, but with a tendency to think they did not cause it.

A better argument can be made that commodities futures trading was never intended for other than the commodities producers to have a method of hedging price swings- though of course non-ETF speculators have been present for a long time.

If speculation did cause the wild price swings, it certainly is not a very good thing. High oil prices impact our entire economy in a very damaging way.

So apparently a great experiment will take place. If they kick out the ETF speculators and oil again spikes to $150 (or beyond), then obviously the speculators were not the problem. And I'm thinking that is what will happen- though for the sake of the country, I hope not. But if oil does spike again, proving the speculation theory wrong, do the powers that be then say "Oops, sorry, I guess we were wrong. You may have your ETFs back now"? Of course not.

I'm wondering if they're going to get a notion to go after market-shorting ETFs too.

[rjwjr]

Re: The elimination of ETFs & ETNs

ETF's: A Little Picture Book About Blame







Chapter 1: The damn Democrats are to blame. The damn Republicans are to blame.






Chapter 2: Let's blame speculators & investors.








Chapter 3: The speculators respond.







Chapter 4: The real culprit for the spike in oil prices.







The End (literally)

[newnewthing]

Re: The elimination of ETFs & ETNs

Lol! Great images, funny, and all to accurate.

[goadam1]

Re: The elimination of ETFs & ETNs

Great one Metalman!

ETF's: A Little Picture Book About Blame







Chapter 1: The damn Democrats are to blame. The damn Republicans are to blame.






Chapter 2: Let's blame speculators & investors.








Chapter 3: The speculators respond.







Chapter 4: The real culprit for the spike in oil prices.







The End (literally)

[flintlock]

Re: The elimination of ETFs & ETNs

You mean rjwjr I think. And I agree, funny post.

[Spartacus]

stockpilers of actual material, NOT paper?

I haven't seen anything to indicate ETFs that stockpile real physical material,

NOT futures

will be affected.

Have you seen anything to the contrary?

[cjppjc]

Re: The elimination of ETFs & ETNs

There are various pro and con arguments as to whether "speculators" caused the oil price spike. Mostly they leave me uncertain, but with a tendency to think they did not cause it.

A better argument can be made that commodities futures trading was never intended for other than the commodities producers to have a method of hedging price swings- though of course non-ETF speculators have been present for a long time.

If speculation did cause the wild price swings, it certainly is not a very good thing. High oil prices impact our entire economy in a very damaging way.

So apparently a great experiment will take place. If they kick out the ETF speculators and oil again spikes to $150 (or beyond), then obviously the speculators were not the problem. And I'm thinking that is what will happen- though for the sake of the country, I hope not. But if oil does spike again, proving the speculation theory wrong, do the powers that be then say "Oops, sorry, I guess we were wrong. You may have your ETFs back now"? Of course not.

I'm wondering if they're going to get a notion to go after market-shorting ETFs too.

http://www.cbsnews.com/stories/2009/...n4707770.shtml

When 60 Minutes talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.

Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're trying to make money on the market for oil?" Kroft asked.

"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."

He says his members in the home heating oil business, like Sean Cota of Bellows Falls, Vt., were the first to notice the effects a few years ago when prices seemed to disconnect from the basic fundamentals of supply and demand. Cota says there was plenty of product at the supply terminals, but the prices kept going up and up.

"We've had three price changes during the day where we pick up products, actually don't know what we paid for it and we'll go out and we'll sell that to the retail customer guessing at what the price was," Cota remembered. "The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going in to these markets."

About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.

Asked who was buying this "paper oil," Masters told Kroft, "The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."

[jk]

Re: The elimination of ETFs & ETNs

http://www.cbsnews.com/stories/2009/...n4707770.shtml

When 60 Minutes talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.

Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're trying to make money on the market for oil?" Kroft asked.

"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."

He says his members in the home heating oil business, like Sean Cota of Bellows Falls, Vt., were the first to notice the effects a few years ago when prices seemed to disconnect from the basic fundamentals of supply and demand. Cota says there was plenty of product at the supply terminals, but the prices kept going up and up.

"We've had three price changes during the day where we pick up products, actually don't know what we paid for it and we'll go out and we'll sell that to the retail customer guessing at what the price was," Cota remembered. "The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going in to these markets."

About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.

Asked who was buying this "paper oil," Masters told Kroft, "The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."

that's only supposed to happen with stocks, right?

[cjppjc]

Re: The elimination of ETFs & ETNs

that's only supposed to happen with stocks, right?

At the time I was a big believer in the supply/demand/peak oil argument. The facts seem to point in a different direction.

[pianodoctor]

Re: The elimination of ETFs & ETNs

I remember hearing those 60 Minutes comments. It sounds persuasive, it seems logical. However, what about those commodities for which there was NOT futures trading which soared so high along with everything else before the crash, then fell along with the others when the crash happened? This nags at me and until I can understand why non-speculation commodities acted just like speculation commodities, if speculation is indeed to blame, it makes me skeptical though not totally dismissive of the 'it was all the speculators' argument.

[cjppjc]

Re: The elimination of ETFs & ETNs

I remember hearing those 60 Minutes comments. It sounds persuasive, it seems logical. However, what about those commodities for which there was NOT futures trading which soared so high along with everything else before the crash, then fell along with the others when the crash happened? This nags at me and until I can understand why non-speculation commodities acted just like speculation commodities, if speculation is indeed to blame, it makes me skeptical though not totally dismissive of the 'it was all the speculators' argument.

Instead of addressing your question (because I don't have a good answer.) I would point out that demand for oil has not dropped nearly as much as the price has dropped.