Obama's ETF Impact

Washington (TheStreet) -- While President Obama and the Commodities Futures Trading Commission push for greater regulation of the financial instruments at the heart of exchange-traded funds like United States Natural Gas(UNG), investors are suffering the consequences of uncertainty.

In his address on Wall Street yesterday, Obama highlighted the problems with current regulation, saying, "We've seen the development of financial instruments, like derivatives and credit default swaps, without anyone examining the risks or regulating all of the players."

Over the past few months, the Commodities Futures Trading Commission has been examining the role that derivatives-based commodity ETFs, like UNG and United States Oil (USO), have had on the markets they are designed to track.

Managers of these derivatives-based funds are anticipating that position limits may be placed on the number of contracts that each fund owns. This move would effectively limit the growth of the funds, or disable the creation and redemption mechanism that keeps funds like UNG and USO in-line with their underlying value.

In response to the regulatory uncertainty and potential changes, a number of commodities funds have halted creation of new shares. In addition to a voluntary halt by UNG in August, iShares S&P GSCI Commodity Indexed Trust (GSC) and iPath Natural Gas (GAZ) have also halted creation of new shares. Due to regulatory pressure, Deutsche Bank (DB) recently announced the closing and redemption of its PowerShares DB Crude Oil Double Long ETN (DXO). (See Huge ETN Euthanized.)

If Obama's financial regulation touches upon derivatives-based ETFs, the effects will be felt beyond the realm of commodities funds. Leveraged ETFs like Direxion's Daily Financial Bull 3X (FAS) and currency ETFs like PowerShares DB Bearish (UDN) also use derivatives to achieve their strategies.