ETFs Deny Responsibility for Price Swings in Energy Markets

By , Money Morning •

Money Morning Staff Reports

While the U.S. Commodity and Futures Trading Commission (CFTC) believes that speculators using exchange-traded funds (ETFs) are one of the real culprits behind the increasing volatility in energy prices, ETF investors this week told that regulatory agency that it is placing blame in the wrong place.

In a hearing on Wednesday - the third held on this topic by the CFTC - the operators of two major fund groups told the CFTC that they weren't responsible for the big run-ups in gasoline and oil prices seen last summer - and therefore should not be subjected to tough speculative-position limits on the futures contracts used for these types of transactions, Reuters reported.

If anything, the transactions that ETFs, hedge funds and other investor/speculators engage in actually provide "liquidity" to the financial markets, which enables them to operate more safely and efficiently, ETF executives told regulators.

"We believe that the significant increases in energy prices last summer were wholly unrelated to the activities of our commodity-tracking funds using the commodity futures market to hedge the exposure to investors that results from their obligation to track the price movement of a commodity," said John Hyland, chief investment officer for U.S. Commodity Funds LLC - an industry player with $3.9 billion in assets under management as of March 31.

Added Hyland: "In fact, rather than acting as a source of risk, the funds provide investors with a transparent, highly regulated, unleveraged vehicle through which to hedge their pre-existing price risk in commodities."

Hyland is the CIO of both the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) - two ETFs that are among the largest such products in the world.

Commodity speculators have been criticized for pushing up energy prices that hurt consumers at the gasoline pump and raised costs for businesses using large amounts of energy in their operations. Crude oil soared from about $80 a barrel to an all-time-record high of nearly $150 a barrel.

Trade groups that represent transportation firms and other industrial companies attended the hearing and urged the CFTC to crack down on funds and other speculators that cause energy prices to trade in market-destabilizing whipsaw patterns.

"The creation of the futures market was not intended to be a substitute for a gambling casino for Wall Street banks, hedge funds, sovereign funds and index funds," said Paul Cicio, president of the Industrial Energy Consumers of America, a trade group that represents big energy-using industries, like cement, steel, chemicals and paper. Passive index funds and other funds such as ETFs can "undermine price information" in the financial markets.

[Editor's Note: Two related stories that appear elsewhere in today's issue of Money Morning also address the controversies involving exchange-traded funds (ETFs). In the main story, Money Morning Contributing Editor Shah Gilani examines the hidden risks the hugely popular investment funds may pose. To access that story, please click here. In the second related story, industry experts detail the profit potential that exchange-traded funds can provide when investors employ them with care. To access that story directly, please click here.]

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