Commodity ETF Rebuilt

Increased commodity regulation is forcing ETF issuers to find loopholes to keep their strategies alive. The latest funds to reconfigure are Deutsche Bank's(DB) PowerShares DB Agriculture(DBA) and PowerShares DB Commodity(DBC) ETFs.

Rather than shutting down DBA, in the same fashion in which it shuttered giant PowerShares DB Crude Oil Double Long ETN in September, PowerShares will join the list of ETF issuers that are finding creative ways around commodities restrictions.

In order to satisfy the new "safety position limits" set by the Commodity Futures Trading Commission, $3.3 billion DBC and $2.2 billion DBA will reduce positions in corn and wheat futures by the end of October. In addition to enforcing the new limits, the CFTC has revoked an exemption that previously allowed DB ETF products to exceed position limits on agricultural products.

Like other popular commodities ETFs, including United States Oil(USO) and United States Natural Gas(UNG), DBA and DBC invest in commodities futures in order to achieve their tracking strategies. The bigger the ETFs grow, the more futures ETF managers buy.

CFTC hearings in recent months have made it increasingly clear that increased position limits would be placed on futures-based commodity ETFs. In response to looming regulatory changes, ETF managers have variously halted creation of new shares, shut down funds and restructured their underlying investment strategies.

The latest move by PowerShares will be a restructuring. DB has announced that in addition to reducing its holdings in corn, wheat, crude oil and sugar, it would be adding coffee, cocoa, live cattle, copper, natural gas and gasoline. Adding new commodities to the fund will reallocate assets and allow the fund to continue to function within position limits.