Natural Gas Fund Premium Rises to Record 20 Percent
By Asjylyn Loder
Aug. 28 (Bloomberg) -- U.S. Natural Gas Fund’s premium climbed to a record 20 percent, making it that much more expensive than its holdings in the fuel, as it’s stymied from issuing new shares.
The premium advanced from 17 percent yesterday, touching 21.6 percent in intraday trading. It increased from 4.6 percent on Aug. 12, when the world’s largest exchange-traded fund in the fuel said it was temporarily unable to issue new shares because of current and anticipated rules from the Commodity Futures Trading Commission.
“Everyone should sell this thing,” said Matt Hougan, editor-in-chief of IndexUniverse.com and the Exchange-Traded Funds Report.
The fund suspended the sale of new shares because it can’t expand its natural gas holdings on the New York Mercantile Exchange and InterContinental Exchange Inc., according to an Aug. 12 filing with the Securities and Exchange Commission.
The ETF fell 28 cents, or 3.3 percent, to $11.13 in composite trading on the New York Stock Exchange. Natural gas for October delivery fell 17.3 cents, or 5.4 percent, to settle at $3.033 per million British thermal units at 3 p.m. on the New York Mercantile Exchange.
The premium “is going to start disappearing as investors realize that they’re losing money on this bet,” said Bradley Kay, an ETF analyst with Morningstar Inc. in Chicago. “Either that or we’ll see investors migrate to other investments.”
Investors may focus on the likelihood that the premium will disappear and drive the price down, said John Hyland, chief investment officer for U.S. Commodity Funds LLC, the Alameda, California-based parent of the natural gas fund.
“In that case, the premium starts to shrink,” Hyland said in an e-mail today, saying he was concerned any time one of his funds diverges widely from the value of its underlying assets. “A smaller premium is likely a good thing.”
To contact the reporter on this story: Asjylyn Loder in New York aloder@bloomberg.net.
Last Updated: August 28, 2009 17:24 EDT
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I believe another thing that could cause the premium to come down is when they start issuing new shares. The new shares would get issued at NAV, which would allow for short-selling on the open market with the closing of the short sale occurring from the issuance of the newly created shares.
Also, the cash received by the fund from the issuance of the shares would be used to buy more natty contracts, thus bringing up the price of natty, which should serve to narrow the premium further. |
