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New Oil ETF Faces Hurdles

NEW YORK (TheStreet) -- The creators of United States Oil (USO) and United States Natural Gas (UNG) have launched a new fund, the United States Short Oil Fund (DNO).

The premiere of DNO comes at a difficult time for leveraged and commodity ETFs, as regulatory uncertainty puts pressure on many popular funds.

DNO, an inverse-exchange-traded product, is designed to track the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Okla., as measured by the price changes of a designated benchmark futures contract on light, sweet crude oil traded on the New York Mercantile Exchange.

Both regulators and the financial community have threatened the status of derivative-based and leveraged funds in recent months. The Commodities Futures Trading Commission recently held two meetings to measure the effect that passive indexing strategies, like USO and DNO, have on the price of commodities they are designed to track.

In the past, regulators have used a light touch when limiting the trading of futures on the New York Mercantile Exchange. The 2008 oil bubble, global financial crisis and goals of the Obama administration could cause a change in the status quo, however, as "speculators" are targeted with increased position limits. The CFTC is expected to announce increased regulation this fall in a move that will dramatically affect funds like DNO.

While the new restrictions have yet to be imposed, they are already taking a toll on popular exchange-traded products. The release of DNO comes in the wake of the closing of Deutsche Bank's (DB) popular PowerShares DB Crude Oil Double Long ETN (DXO). In anticipation of the new restrictions, DXO's managers shuttered the fund , knowing that the fund's size would make it particularly vulnerable to position limits.

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