CFTC moves to rein in small ETF investors: report

Sat Aug 22, 2009 12:18pm EDT

CHICAGO (Reuters) – Exchange-traded funds or ETFs have become a top target in U.S. regulators’ efforts to rein in excessive speculation in oil and other commodity markets, The Wall Street Journal reported on Saturday.

Commodity ETFs, which came into existence in 2003, offer one of the few avenues for small investors to gain direct exposure to commodity markets. The funds pool money from investors to make one-way bets, usually on rising prices.

Some say this causes excessive buying that artificially inflates prices for oil, natural gas and gold.

Commodity ETFs have ballooned to hold $59.3 billion in assets as of July, according to the National Stock Exchange, which tracks ETF data.

The Commodity Futures Trading Commission has said it seeks to protect end users of commodities, and that cutting out individual investors is not the goal.

“The Commission has never said, ‘You aren’t tall enough to ride,'” CFTC Commissioner Bart Chilton was quoted as saying in the WSJ article. “I don’t want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation — intentional or otherwise.”

Limiting the size of ETFs will result in higher costs for investors, the WSJ reported, because legal and operational costs have to be spread out over a fewer number of shares. Investors range from individuals to banks and hedge funds with multimillion-dollar positions.

The CFTC is currently considering a host of measures to curb excessive speculation, including position limits in U.S. futures markets. Many U.S. lawmakers called for greater regulation of some commodity markets after a price surge last year sent crude oil to a record high of $147 a barrel in July 2008.

(Reporting by Matthew Lewis; Editing by Toni Reinhold)

A Few ETF/ETN Picks

A little slower moving than our stock picks.

We’re going to cover two main areas: healthcare and commodities.

First we will add both the RYH (Rydex Equal Weight Healthcare ETF) and the IXJ (iShares Global Healthcare ETF). We like several stocks in the Healthcare sector right now and these two are a good way to cover it all with a lower volatility package. Look for specific stock picks to follow as we expand on this theme and follow the sector rotation of capital.

Next up are the recently beaten down commodity plays. Here we’ll pick up the JJA (iPath Dow Jones-AIG Agriculture Total Return ETN), KOL (Market Vectors Coal ETF) & GAZ (iPath Dow Jones-AIG Natural Gas Total Return ETN) while they are on sale. While KOL is an ETF comprised of stocks, that provides targeted exposure to companies worldwide that are engaged in the coal industry; both JJA & GAZ are Exchange Traded Notes based directly on the commodities. GAZ tracks the Henry Hub Natural Gas futures contract traded on the NYMEX.  JJA includes Soybeans, Corn, Wheat, Soybean Oil, Sugar, Coffee & Cotton with Soybeans & Corn comprising half of the weighting while the Softs (Sugar, Coffee & Cotton) only hold barely a quarter all together with Wheat & Soybean Oil roughly sharing the final 22.5%.  To balance out this mix, consider adding JJS (iPath Dow Jones-AIG Softs Total Return ETN) which includes roughly a third each of Sugar, Coffee & Cotton.  Finally, another Soft totally missed by the larger ETNs, yet available alone, is NIB (iPath Dow Jones-AIG Cocoa Total Return ETN).

Both JJS and NIB are barely a month old so there is not much to go on, but the charts of the underlying futures contracts look poised to bounce.  At this point, we would only nibble on NIB and use JJS to balance out the weighting of the JJA if you are trading large positions or have a strong desire to be equally allocated.