Dion: Investor Alert -- UNG Shares to Slide

This item originally appeared on Sunday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

In a filing Friday, managers of the United States Natural Gas ETF(UNG Quote) announced that the fund would resume the creation of new shares, a move that could send the fund tumbling more than 16%.

The regulatory notice acknowledges that "the resumption of creation activity, even on a limited basis, could reduce or remove any premium" in the fund's price. As of Friday, UNG was trading at a 16.12% premium to its net asset value. While creation will not resume until Sept. 28, this announcement will have an immediate impact on UNG's price on Monday, Sept. 14.

Creation of UNG shares was initially halted in July when the fund hit the preapproved number of shares, and managers requested the approval of more units. The Securities and Exchange Commission granted the request for additional shares in August, but in an interesting twist, UNG managers decided to voluntarily keep creation at a standstill.

Futures-based commodity funds like UNG have been halting the creation of new shares in response to anticipated regulatory changes from the Commodities Futures Trading Commission (CFTC). In recent sessions, the CFTC has been examining the role that passive indexing instruments like UNG have on the price of the commodities that they are designed to track.

Suspension of the creation process has effectively turned ETFs like UNG into closed-end funds. The combination of UNG's creation halt and continued interest in the natural gas market has pushed shares of UNG to extreme premiums to NAV.

Friday's filing noted that, "investors are cautioned that paying a premium ... for UNG units can lead to additional losses for the investor in the event that the investor sells such units at a time when the premium is no longer present in the market price." It will likely take until Sept. 28 for the fund to return to NAV, but current shareholders could feel the pain immediately as investors react to the news.

Regulatory speculation and creation suspension has disabled UNG, not allowing the fund to function as an ETF. As fund managers kick-start the creation process, the UNG premium bubble will pop. Buyer beware.