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My Thoughts on the UNG Voodoo and Other ETFs

July 7, 2009 By Steven Place

So if you hadn't yet noticed, UNG was halted today on news.

ETF Halted = No Yay.

Essentially, they can't form new units due to the sheer popularity of the etf-- since it is an open ended etf they can create more shares, but they also have to bring about more exposure via natty futures and swaps.

This should throw warning flags out for anyone interested in etfs that "seek to replicate" any sort of underlying commodity. I know there are risks in trading these, but the fact that the trade is getting so crowded could be indiciative of further structural weakness in particular etfs. The few that come off the top of my head: UNG, USO, DBC, DBA.

On top of that, when you "invest" in a particular etf, you have to "invest" in the fund's ability to not suck at contract rollovers, especially if they deal in the front month futures. The rollover period is getting so bad that there are whispers of traders considering to refuse to trade during these etf rollover days.

I'm not saying I won't trade them again-- but I'll definitely have to analyze the structural risks further before putting on a longer-term position.

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