UNG May Resume Share Creation

The United States Natural Gas Fund LP (UNG) filed a Form 8-K with the SEC on Friday (9/11/2009) indicating that it may resume offering new shares on September 28.  You may recall that UNG stopped issuing new shares in the second week of July.  Additional background can be found in our CFTC Camel Sticks Nose in ETF Tent article.

In reading the UNG 8-K filing, the fund makes no promise to resume share creation.  In fact, it spells out four conditions where new share creation may take place:

1. At its sole discretion, UNG may accept “specified  investments that meet UNG’s investment objective”  from Authorized Participants in exchange for newly created shares.  The “specified investments” are to be an over-the-counter swap contract between UNG and the Authorized Participant.
2. UNG’s management may decide to limit the number of new shares to any single Authorized Participant.
3. UNG’s management may vary the terms and conditions of the investments to be delivered.
4. UNG’s management may decide to offer new shares only on particular days.

The core of the filing is the first condition listed above.  Namely, UNG intends to circumvent exchange-imposed position limits by having the Authorized Participants be responsible for hedging their positions with futures contracts.  The use of swaps relieves UNG from the need to buy additional natural gas contracts while causing Authorized Participants to shoulder that burden.

UNG also makes two new disclosures that investors should be aware of.  First is that UNG’s expenses are expected to increase with these proposed swap arrangements and therefore the fund’s expense ratio will likely increase, as will its tracking error.

The second disclosure involves UNG’s current premium and is repeated here:

“At present, UNG’s units are trading at a premium to its net asset value (“NAV”).  UNG’s management cannot predict what impact, if any, the resumption of creation activity will have on the price of the UNG units on NYSE Arca.  It is possible that the resumption of creation activity, even on a limited basis, could reduce or remove any premium over NAV.  Investors are cautioned that paying a premium over the NAV for UNG units can lead to additional losses for the investor in the event that the investor sells such units at a time when the premium is no longer present in the market price.”

Investors should be aware that this filing may also reduce the premium.  The premium is constantly changing.  Around an hour before the close today, UNG was trading at $10.94 while its underlying value was $10.32, a premium of about 6%.  At the same time, competitor iPath DJ-UBS Natural Gas Total Return ETN (GAZ), another fund that has halted share creation, was trading at an 11% premium (price of $15.18 and underlying value of $13.67).

Links to UNG website and GAZ website.

Disclosure: no positions