UUP Runs Out Of Shares

Odd things are happening in PowerShares DB US Dollar Bullish ETF (NYSE: UUP).  On Thursday (11/5/09) PowerShares was forced to halt trading in this normally unremarkable fund while they filed an application with the SEC to issue more shares.  Like most securities, ETFs are issued under a prospectus which allows the sponsor to issue a defined number of shares.  This facilitates the creation/redemption process that keeps ETFs priced in line with their net asset value.

Faced with a sudden surge of interest as the dollar reversed higher in recent days, UUP just ran out of shares.  This prevented market makers from engaging in their normal arbitrage activity.  As a result, UUP began trading at a premium to its actual value, behaving essentially as a closed-end fund.  PowerShares halted UUP briefly on Thursday, announced it had filed an application with the SEC to issue 100 million new shares, and then resumed trading.  UUP now trades at about a 2% premium, and will probably continue to do so until the SEC acts on the filing.  This means anyone who buys UUP today will effectively be paying $102 for something that is really worth $100.  Not a good trade, in my view.

There was unusual activity in UUP options on Wednesday, which is making some commentators suspect insider trading or manipulation.  Anything is possible, I suppose, but the number of shares outstanding is no secret.  Someone could have simply noticed UUP was about to hit its limit and decide to take advantage of the situation.  This would be clever but, so far as I know, not illegal.

In any case, UUP is probably not the best way to bet on a rising dollar right now.  Possible substitutes would include inverse funds based on other major currencies, which are in effect a bet on a rising dollar.  ProShares UltraShort Yen (NYSE: YCS) and ProShares UltraShort Euro (NYSE: EUO) fit the bill.  Two open-end mutual funds are also candidates: ProFunds Rising U.S. Dollar (Nasdaq: RDPIX) and Rydex Strengthening Dollar (Nasdaq: RYSBX).

 

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.