New Commodity ETF Skirts Limits

NEW YORK (TheStreet) -- The new Jefferies-TR/J CRB Global Commodity Equity Index Fund(CRBQ) is not a pure play on global commodities, but equities-based ETFs may be the best bet for now.

The new fund tracks a basket of 148 global companies that derive "50% of its annual revenues from the production and distribution of commodities and commodity-related products and services." The fund's top five holdings in the fund are Monsanto(MON), Exxon Mobil(XOM), Potash(POT), Syngenta(SYNN) and Archer-Daniels-Midland (ADM).

While futures contracts may be the purest way to play commodities, the ETF industry has run into some snags with commodity-related products. The Commodities Futures Trading Commission has indicated that greater restrictions will be placed on the number of futures contracts that a single ETF can hold, a move that has disabled some popular futures-tracking ETFs.

CRBQ avoids restrictions on underlying commodities futures contracts through its construction. The new fund is to PowerShares DB Commodity Index Tracking(DBC) what First Trust ISE-Revere Natural Gas(FCG) is to United States Natural Gas(UNG). CRBQ and FCG track commodity equities while DBC and UNG track commodity futures.

The problem facing DBC, UNG and other similar ETFs is that futures limitations can stall creation. In order to grow and track their underlying indicies, ETFs engage in the creation and redemption of shares. If funds like DBC and UNG are not allowed to buy enough futures contracts to create new shares, two equally unfavorable things can result: a creation halt or fund shutdown.

UNG halted creation from early July through late September due to two regulatory hang-ups. As creation screetched to a halt, the fund's premium ballooned to more than 15%. This may have been a pleasant surprise for long-term holders who got in before July, but it was a nasty tax to natural gas investors in late August.