Deutsche Bank, one of the largest issuers of commodity ETFs, has announced that it will liquidate its PowerShares DB Crude Oil Double Long Exchange Traded Notes (DXO), noting in a press release that “limitations imposed by the exchange on which Deutsche Bank manages the exposure of the Notes have resulted in a ‘regulatory event’…which has caused Deutsche Bank to redeem the notes.”
As part of the winding down process, within the next two weeks, DXO investors will receive the cash equivalent of the net asset value of their holdings in the ETN. As Morningstar’s Scott Burns notes, it is important to note that investors will be receiving the NAV of the note assets, rather than the market value. DXO, like other commodity exchange-traded products, has stopped issuing new shares in recent weeks, resulting in shares of the fund trading at a premium to NAV. “So if you bought this fund at a premium, you are out of luck unless you can sell it at the same premium,” notes Burns. Burns suggests that investors sell their holdings in DXO as soon as possible, but notes that most of DXO’s premium evaporated shortly after the announcement. In an extreme example of supply/demand imbalance for commodity funds, the U.S. Natural Gas was recently trading as high as 20% above its net asset value.
So what sunk DXO?
The fact that the Commodities Futures Trading Commission (CFTC) is expected to place position limits on commodity ETPs later this year certainly didn’t help. The fear in the ETF industry is that many funds are already over the position limits that will ultimately be imposed, and that such funds will be forced to liquidate a portion of their holdings to come into compliance http://etfdb.com/2009/crude-oil-etf-shuts-its-doors/