Despite Getting Approval, UNG Won't Issue New Units

August 13, 2009

The UNG ETF's manager is holding off on releasing new creation units.


Shares of the popular U.S. Natural Gas Fund have been trading like a closed-end fund. That apparently won't change for awhile.

According to interviews with the Wall Street Journal and Reuters, the manager of the fund (NYSE Arca: UNG) says even though regulators have approved issuing more creation units, his company has decided not to do so.

At least for the time being. "We just don't feel it's prudent to accept [new unit] creations and then attempt to use the money to purchase more natural gas products when we have a strong belief that the CFTC is going to mandate limits that would either cap us or force us to reduce our holdings," John Hyland, UNG's manager, told the paper in its Thursday edition.

In an earlier Reuters story, a UNG spokeswoman explained that new creation units were also being delayed due to a desire by management to cut UNG's listed futures holdings.

"We are working on adding other natural gas investments that would allow us to reduce our listed futures holdings to at or below whatever new limits are imposed by regulators. We have already begun the process and have in fact arranged the first alternative investment within the last few weeks," she told the wire service.

"That said, due to concerns about both potential higher expenses or potential counter-party credit risk, we will not rush into alternatives unless management believes the arrangements are prudent and make sense over both the short-term and long-term," the spokewoman added in the story.

UNG's assets have swelled in recent months as speculation on natural gas prices became a favorite of deep-value-minded traders. Now at around $4.2 billion in assets, UNG has become something of an anomaly in the ETF marketplace.

More Hiccups Around The Corner

In mid-June, the fund's manager watched while assets soared to $4.5 billion. That was up from around $700 million in March. In fact, within two weeks between the end of May and early June, UNG's assets more than doubled.

Meanwhile, its average daily volume from spring to early summer jumped more than fourfold. (See related story here.)

As we pointed out in that June look at UNG and its closest competitor, the First Trust ISE-Revere Natural Gas ETF (NYSE Arca: FCG), major hiccups were around the corner for investors.

That certainly has turned out to be the case.

UNG invests in futures contracts and other derivatives. It basically operates as a commodities pool, which subjects it to different regulations than most other ETFs and open-end mutual funds. A part of that regulatory process requires the United States Commodities Funds LLC, which runs UNG, to formally submit requests to issue new creation units.

The firm was forced to do just that in June, asking the Securities and Exchange Commission for permission to offer another 1 billion units. (See related column on the situation here.)

Trading At Hefty Premium

The SEC has a record of dragging its feet with such requests relating to UNG. The last time sponsors wound up in this situation, in May, the ETF had to close for two days to make new creations.

Of course, the fund is still accepting redemptions. But by closing issuing of new creation units, UNG's share price is now trading at a hefty premium over its net asset value. Heading into trading on Thursday, that's now approaching 6%.

The result is that since early June, UNG has been acting more like a closed-end fund than an open-end ETF. While investors already in the fund have seen the paper value of their shares increase, a cardinal sin of closed-end fund investors is to buy at a premium.

What sort of market current UNG investors will find going forward for their investment if they decide to get out remains a question. While it's understandable that UNG's management feels jerked around by government regulators, the longer they refrain from issuing new units, the more the fund will act differently than the one originally offered to investors.

(By the way, you can find the transcript of Hyland's testimony last week before the CFTC here.)


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