Earlier in the month, we told you about a regulatory issue which forced a few natural gas ETFs to experience a modest premiums. These ETFs, the United States 12 Month Natural Gas Fund (UNL - ETF report) and the United States Short Oil Fund (DNO - ETF report) , were required to halt creations as a result of an SEC paperwork holdup for a few days.
The snag pushed UNL to a couple percentage point premium over its NAV, at least for a few days. This means that the product was sort-of trading like a closed-end fund and that the trading value of the ETF was higher than the underlying security due to the temporary scarcity of the shares (see Caution: Natural Gas ETF Trading at Premium).
However, as expected, the SEC paperwork issues were resolved and the funds were able to create new shares after a few days. Once these new shares hit the market, the premium over NAV collapsed pushing UNL back down to trading at its net asset value.
The issue took just a week to resolve and for investors who either held their shares across the period or those who waited until the 16th to get into UNL, it wasn’t much of a problem. However, for investors who bought or sold during this strange premium time, returns may have been slightly higher than what one would have expected, based on the underlying performance of the natural gas futures in the product.
This means that it probably was a decent time to sell UNL, although the fund has continued to rally past the highest premium point in recent days. Still, for investors looking to cash out with a high premium over NAV, the recent trading period was among the best, as the product has done a remarkably good job of tracking its net asset value besides this recent one week aberration (see Have the Natural Gas ETFs Finally Bottomed Out?).
It is also worth pointing out that investors did not see a similar situation in other natural gas ETFs in recent trading. The other two competing products, (UNG - ETF report) and didn’t see a spike in premiums, and actually both saw a discount during UNL’s troubled week.
All three are now trading pretty close to NAV, but it is worth noting that these kinds of problems can happen from time to time. Due to this, it is very important to check out an ETF and where it is trading in comparison to its NAV—especially in the futures/commodities world—before buying or selling a product (see The Comprehensive Guide to Natural Gas ETFs).
While the difference may not be enormous, a couple of percentage points can make a big deal in the long run. So just remember to use extreme caution when dealing with ETFs that are trading at a somewhat artificial premium (or discount) to NAV, as you can never be sure how long these types of issues will last.
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