New Oil ETF Faces Hurdles

United States Commodity Funds LLC, the creator of DNO, is well versed in the difficulties that the new inverse oil fund could face. One of the issuer's most popular funds, United States Natural Gas, had to halt share creation in July when the fund reached critical mass. The gigantic fund began to trade at extreme premiums to its underlying value while fund managers waited for the approval to continue growing the fund.

DNO will face the same hurdles that tripped up DXO and UNG as the fund grows. While creation limitations may take a while to kick in, there is a good chance that this fund could be curtailed if it proves to be popular. Early indications, including DNO's first-day trading volume, seem to indicate that this fund could attract a large number of investors.

The warning on the bottom of DNO's website succinctly sums up the fund's risks: "Commodities and futures generally are volatile and are not suitable for all investors. The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund. Funds that focus on a single sector generally experience greater volatility."

While these factors alone should give investors pause before buying DNO, the most threatening factors are outside of the issuer's control. New regulation could dramatically impact the way that funds like DNO operate. Investors should hold tight and gauge the regulatory affects before jumping in DNO.

-- Written by Don Dion in Williamstown, Mass.