ETF Radio Show

Threat of Regulations Doesn’t Keep Commodity ETFs Down

In a time of uncertainty and hurdles for leveraged ETFs, the creator of the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG), the United States Commodity Funds LLC, has launched the newest member of its family, the United States Short Oil Fund (DNO).

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

The introduction of DNO comes at a time when the CFTC has been scrutinizing commodity ETFs.  Although the regulations have still not been imposed, many have felt threatened by the anticipation of the new restrictions, which have even forced some, like the PowerShares DB Crude Oil Double Long ETN (DXO) to shut down, knowing that the fund’s size would make it particularly vulnerable to position limits.

DNO will most likely face the same issues and problems that other commodity ETFs have; however, on the positive side, creation limitations may take awhile to kick in, but when they do, there is a good chance that this fund could be curtailed if it proves to be popular.

You Can’t Handle the Truth

Bloomberg believes that the public can “handle the truth” regarding the Federal Reserve’s activities with banks.

By Wednesday, we’ll arrive at another key juncture in the dispute pitting Bloomberg (and other media outlets) against the Federal Reserve (and a host of banks) over release of information detailing recipients, beneficiaries and parties to roughly $2 trillion in disbursements of funds and taking on of loans by the Federal Reserve since last October.

Bloomberg first filed suit for release of the information via the Freedom of Information Act last November.  Last month, U.S. Chief District Court Judge Loretta Preska issued a 47-page order demanding that the Federal Reserve, on behalf of the taxpayer, provide information detailing recipients of funding or loans and participants in the Federal Reserve’s emergency programs.

The deadline for complying with the order was August 31, but the Fed filed for and was granted a stay until September 30 at which point it must either comply or file an appeal.

The Fed and banks have argued that divulging the information could negatively impact the public’s confidence in some institutions and that the prospect of public disclosure might give banks pause in the future when contemplating participation in emergency programs involving the Fed.  The Fed appears to have much of the banking industry on its side.  If the Fed and those in the banking industry are correct, then an opening of the books to public viewing could lead to increased volatility in financials and, potentially, negative pressure on some institutions.

If no appeal is filed or if an appeal is rejected, here’s a slate of important banking and financial sector ETFs to keep an eye on: XLF, IYF, IYG, IAI, IAT, KBE, KRE, KCE, KIE and VFH.

The President, having expressed a commitment to transparency, is faced with an interesting dilemma: any appeal filed this week would be spearheaded by Solicitor General Elena Kagan – who reports to the President’s Attorney General Eric Holder.

With activities of the Federal Reserve presently so deeply imbued with the economic (and investment) landscape, this case may serve as a defining moment in relation to the extent and form of information on Federal Reserve activities and the banking system to which the public has access during the coming years.

How To Play the Dollar With ETFs

Recently, the US dollar has drawn much attention as it has rebounded from a one-year low against the euro, its volatility has influenced commodity prices and a carry trade in the currency has emerged.

The Federal Open Market Committee (FOMC) has acknowledged that the US economy is emerging from a prolonged recession, however, at the same time the Federal Reserve has announced that it will maintain its near-zero interest rate into 2010.  This low interest rate, in conjunction with the dollar’s price levels and its easiness to borrow make it the perfect funding currency for carry trades.

Carry trades are when investors borrow a currency at negligible interest rates to invest in higher yielding currencies, and this can be detrimental to the currency being borrowed – in this case the dollar. 

The dollar also faces downward pressure as investors’ risk appetite increases.  As the global economy is slowly emerging out of a recession, many investors are starting to put their money into riskier investments which offer higher yields and take their money out of the dollar, which has traditionally been known as a safe-haven for international investors.  Lastly, the dollar has taken a hit by the massive amounts of money that the federal government has printed to bailout and aid the nation out of a recession.

As for the near future, the fundamentals of the dollar remain weak and the overall health of the global economy points to an unfavorable trend for the currency.  Whether or not you agree with the bearish case for the dollar, there are several ETF choices for both bears and bulls.

To short the dollar, one can choose the PowerShares DB US Dollar Index Bearish (UDN) and if one thinks that the dollar is going to rally, the PowerShares DB US Dollar Index Bullish (UUP) is a good play.  To get a bit more creative, one can consider the PowerShares DB G10 Currency Harvest (DBV), which holds long futures contracts on the three G10 currencies associated with the highest interest rates and short futures contracts on the three G10 currencies with the lowest interest rates.

Deloitte Report on ETFs

Deloitte LLP recently released an excellent report titled “Exchange-Traded Funds: Challenging the Dominance of Mutual Funds?” 

For anyone interested in learning more about how ETFs work, how they compare to mutual funds, and why they’re exploding in popularity, this piece provides an easy to read, straightforward and independent overview.

In answering the title question of the report, Deloitte concludes with the following:

“ETFs are likely to increase their share of investment dollars and become the fastest-growing investment product as funds from declining mutual funds transition to ETFs.  A research report suggests that ETFs are a threat to mutual funds because advisors, both strategic-asset allocators and ‘tactical-asset allocators, are increasingly using ETFs as part of investors’ portfolios.”

We couldn’t agree more with their assessment and invite others to review this independent report for insightful information on the entire ETF landscape.

China Still Rules Commodities

As some seemed to believe that commodity prices would fall due to a slowdown in China, it appears that they were wrong.

China’s race for commodities and resources continues as the nation announced that China Investment Corp (CIC) will purchase $850 million worth of shares representing a 15% stake in commodities-focused and Hong Kong-based Noble Group.  What’s so unique about this stock purchase is that it enables emerging China to gain access to all parts of the commodity supply chain, from farm or mine production to shipping and marketing.  And Noble’s market footprint is expansive, covering 40 countries.

China has been on a buying binge across the raw materials landscape, snapping up industrial metals such as iron ore, copper, alumninum, and zinc and ags such as soybeans and cotton.  The move is expected to help China diversify its presence across the commodity supply chain and should enhance its flexibility in managing the supply side of it growing physical commodity appetite.  The move will also provide diversification away from its central bank reserves, more than half of which are held in dollar-based assets such as US Treasuries and agency debt.

Several commodity-related ETFs could be impacted by continued growth of demand from China and other emerging economies.  Futures-based exposure to diversified commodities baskets can be accessed via DBC and GSG (be advised that GSG recently closed to new share creation and is trading at a premium to NAV) or DBB for base metals. Alternatively, exposure via equity ETFs holding stocks of companies engaged in the commodity arena would include IGE and the recently launched CRBQ.  An equity ETF having a narrower focus in the metals and mining space would be XME while MOO could be used to cover equities related to agricultural commodities.