Saturday, September 12, 2009

Another ETF giving Larry a headache

Having given up on trying to invest in natural gas with USG, Larry (the retail investor) decided to go for a broad commodities index. And why not. The dollar is on a downward path and some commodities exposure could do the old portfolio some good. Larry chose GSG, the liquid iShares ETF that mimics the the Goldman commodities index (S&P GSCI).

But something caught Larry's attention as he was doing his research. From Barclays Global Investors (BGI):
[BGI] has temporarily suspended further creation of new shares of iShares S&P GSCI Commodity-Indexed Trust (the "Trust"). The Trust is listed and trades on the NYSE Arca under the ticker GSG. As disclosed in the Trust's prospectus, a suspension may cause the market price of the Trust's shares to vary more from the Trust's net asset value than historically.

What? Another closed ETF with no more share creation? And what a surprise, it's starting to trade at a premium (the announcement to suspend share creation was on August 24th). GSG is easier to short than USG, so the premium may periodically get taken out, but if the market sees that the share creation will be suspended for a while, the premium may persist.

Larry is now concerned because in addition to taking on the commodity exposure, he's also taking on some CFTC regulatory risk. Plus he may be taking on the risk of GSG/iShares getting dealers to line up a TRS program instead of futures contracts that GSG normally used.

From BGI:

"We are actively working with regulators, product partners and exchanges to explore solutions that will lead to resumption of the creation of new shares of the iShares S&P GSCI Commodity-Indexed Trust to satisfy demand," said Michael Latham, Co-CEO of iShares at Barclays Global Investors. "We've taken this temporary step to protect existing investors from being adversely affected by market reaction to proposed new regulations of commodity futures that have created uncertainty.

So thanks again CFTC. Not only have you stopped Larry and his vicious gang from speculating on natural gas, but you may also be able to keep him from the broad commodity index speculation. Good to know that our commodity markets are protected and supervisory objectives well prioritized.

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