Natural Gas ETF: Hazardous Trading
NEW YORK (TheStreet.com) -- The latest chapter of the U.S. Natural Gas (UNG) saga raises an important point about ETF trading. The halt in UNG's creation process has caused the fund to trade at a ridiculous 11% premium and the fund should be ashamed to call itself an ETF.
It is the creation and redemption process that makes ETFs unique, and stripping them of this ability is like gutting a central premise. Wait -- there's a name for funds that have a fixed amount of units: closed-end funds.
Liquidity is an important measure of viability when examining an ETF. A consistently high trading volume generally indicates a high level of investor interest. This makes it easier for investors to buy and sell shares in the open market.
UNG certainly does not lack in this category. Despite the fund's stunted status, millions of shares of the fund are still trading hands. Trading in UNG should be halted immediately and stay halted until this fund can get back on track. ETFs are not only designed to track an index, but to do so transparently. "Transparent" is hardly a word that one can use when describing the current state of UNG. The fund's refusal to create additional units is an admission that the fund managers are not sure of what the fund's investment strategy should be. UNG is currently examining investment alternatives for the fund's assets. Managers have been buying swaps and unloading soon-to-be-regulated futures contracts. A halt in trading would allow UNG managers to wait for answers from the Commodities Futures Trading Commission (CFTC) and come up with a game plan.
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