UNL Trades At Premium On Creation Halt

January 11, 2013

UNL, saddled with closed creations for a spell, suddenly looks like a closed-end fund.

The United States 12 Month Natural Gas Fund (NYSEArca: UNL) leaped 2.5 percent Friday, building up a premium to its net asset value as a suspension in its creations linked to the filing of regulatory paperwork went into its second day.

Shares of the ETF traded as high as $17.51, tagging on a premium of 2.9 percent relative to its intraday net asset value of $17.00 a share. That premium was as wide as 3.3 percent at one point in the session, according to data compiled by IndexUniverse—a move that is making it seem a bit like a closed-end fund until creations are resumed.

Creations on UNL were halted Thursday, as the fund’s sponsor, United States Commodity Funds, fulfilled a regulatory requirement to update its registration statement. Creations will remain halted until the Securities and Exchange Commission approves the new document, a process that can take a few days, sources say.

The halt in creations breaks the mechanism that usually prevents an ETF from trading at significant premiums to its NAV because investors are chasing a limited supply of shares in the secondary market. When creations—and redemptions—are happening normally, funds tend to closely track their underlying NAV.

The price action is similar—for today, at least—to what happens to the iPath Natural Gas ETN (NYSEArca: GAZ) on an ongoing basis. It has been closed to creations since late 2009, and since then its market price has, at times, ballooned to more than 100 percent of NAV.

It’s basically a closed-end fund now, and as far as that goes, it’s also a “broken” security, as IndexUniverse analyst Carolyn Hill called it in a blog.

Apart from UNL’s itinerant status as a closed-end fund, traders are also linking UNL’s momentum to above-average trading volume as the fund flirts with its 200-day moving average, attracting investor attention.

From a fundamental perspective, renewed strength in the natural gas market in the past few days tied to forecasts for colder-than-normal temperatures in the U.S. Midwest and East Coast is also helping UNL rise, HardAssetInvestor.com analyst Sumit Roy said.

Still, it’s worth noting that overall, the U.S. winter has been a mild one, and prices have recently “merely recovered” the losses from earlier in the week, Roy said.



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