Is UNG's full-court stall really going to work? Or is the natural gas ETF in deep doo-doo?

One of the most frustrating as well as fascinating stories we've been following in recent months is the ongoing saga with the United States Natural Gas Fund (NYSE Arca: UNG). We've seen its assets soar and we've seen them run into a significant roadblock due to increased friction over commodities in general, and more specifically, speculative investing.

We reported the other day on the latest news, that the government has granted the fund another billion shares to issue. But seemingly out of the blue, its manager John Hyland has essentially told the government: No way, Charlie. We're not getting on this regulatory roller coaster.

I could go on about what this might mean and how it could impact investors. But my wind has been taken by our research director, Dave Nadig. This morning he turned in his latest column, "Stand-Up Guy Vs. Fall-Guy."

His argument is that Hyland basically took an immediate $1 million hit by keeping UNG closed. (As an intrepid editor, I'd do the math myself, but Dave lays it out pretty simply. It's a real eye-opener.)

And Dave takes on the critical issue of how Hyland's decision—which basically keeps the ETF acting like a closed-end fund—will realistically impact investors.

I like his take on both counts. But it still leaves one big issue open in my mind. Even though UNG's temporary closed-end characteristics might temporarily change the complexion of the fund (as Dave notes, it was trading at a huge 8%-plus premium at the close of trading yesterday), how big of a deal should that be to investors?

In his Critical Thinking column, Dave gives a correct assessment. He's right and it's hard to argue with his logic and fact-based conclusion. Still, anyone investing in UNG did so based on a certain view of what they were getting into—an open-end fund, not a closed-end fund.

This is largely a theoretical issue at this point, however. After all, Hyland has the power now at any point to reopen the portfolio. His reasoning for not doing so is obvious—with regulators still debating what they're going to do with commodities funds (the reason why they held up a decision on UNG in the first place), why jerk investors around more?

Keeping UNG closed is a gutsy call, especially given the current regulatory environment. Unfortunately, UNG seems to have been pulled into the debate over use of leverage in niche ETFs.

But longer term, will some investors be scared off from putting money into ETFs that can so easily change stripes? This certainly is going to be great fodder for both the closed-end fund community as well as active mutual fund managers.

Should Hyland immediately open UNG to new creation units, simply out of an altruistic notion that what started as an open-end fund should remain that way at all times—no matter what political or economic factors might otherwise indicate?

Murray Coleman is editor at IndexUniverse.com. He welcomes comments and suggestions for future blogs at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it