DB Commodity ETFs Face New Restrictions
August 20, 2009

SAN DIEGO (ETFguide.com) – The rhetoric by financial regulators of greater restrictions on the buying and selling of commodities futures contracts has finally come to fruition. 

The U.S. Commodity Futures Trading Commission yesterday announced it is withdrawing two no-action letters that originally provided exemptive relief from federal agricultural speculative positions limits set forth in CFTC regulations. The letters pertain to the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), which was previously allowed to take positions in corn and wheat futures that exceeded federal limits. 

“I believe that position limits should be consistently applied and vigorously enforced,” CFTC Chairman Gary Gensler said. “Position limits promote market integrity by guarding against concentrated positions.”

The revised restrictions limiting commodity positions become effective on October 31st and will force PowerShares and Deutsche Bank to alter their indexing strategies to comply with the new guidelines. 

Unlike commodity ETFs in its peer group, such as the iShares S&P GSCI Commodity Index Fund (NYSEArca: GSG) and the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC), the PowerShares DB Commodity Index Tracking Fund is much more concentrated than its diversified counterparts. DBC’s underlying index is composed of futures contracts on just six commodities, weighted in the following manner: Light sweet crude oil (35%), Heating Oil (20%), Gold (10%), Aluminum (12.5%), Corn (11.25%), and Wheat (11.25%).

Other commodity ETFs or trusts are facing challenges. 

The $2.3 billion PowerShares DB Agriculture Fund (NYSEArca: DBA), which has a 25% allocation to just four commodities (Corn, Soybeans, Sugar and Wheat) will also be impacted by the CFTC’s trading restrictions.

Another commodity related trust, the U.S. Natural Gas Fund (NYSEArca: UNG) has faced regulatory scrutiny along with operational difficulties.

UNG’s manager, Victoria Bay Asset Management, recently appealed to the S.E.C. after it ran out of shares to issue. While its request for share expansion was granted, the fund has not issued new shares mainly to avoid running afoul with commodity regulators who have been seeking to place limits on positions in natural gas futures. UNG now trades at a 12% premium to its net asset value (NAV). 

In related news, Deutsche Bank announced its plan to temporarily suspend the share issuance for the PowerShares DB Crude Oil Double Long ETN (NYSEArca: DXO). The note attempts to deliver 200% the monthly performance of the Deutsche Bank Liquid Commodity Index - Optimum Yield Oil Excess Return Index. The index is composed of futures contracts on light sweet crude oil.

As a result of the halt, DXO’s share price is likely to trade with premiums or discounts to its underlying NAV, making it resemble a closed-end fund. However, since DXO has an ETN structure, its holders are also subject to credit default risk by Deutsche Bank.  

Deutsche Bank had no other public comments to make concerning DXO other than a press release issued on August 18th.