Oct. 2 (Bloomberg) -- U.S. Natural Gas Fund, the largest exchange-traded fund in the fuel, issued 7 million new shares today, the first new units for the ETF since July because of regulatory efforts to limit market speculation.

The new shares, worth $79 million, are backed by a total return swap with an investment grade counterparty, the fund said on its Web site. The Alameda, California-based ETF, known as UNG, has said it would offer new shares starting Sept. 28 to purchasers who bought creation baskets of 100,000 units, which are then sold on the open market.

“UNG continues to work to re-balance the existing portfolio of natural gas exposure by using a range of suitable investments including listed futures contracts, listed cleared swaps, as well as over the counter total return swaps,” John Hyland, the fund’s chief investment officer, said in an e-mail.

The $4 billion fund grew 11-fold since the start of the year to 347.4 million shares outstanding before it ran out in July. The fund backs its shares with natural gas contracts or swaps, and has been unable to expand its fuel holdings on the New York Mercantile Exchange and the Intercontinental Exchange Inc. because of limits on energy speculation.

To sidestep the position limits, the fund began in July buying bilateral, over-the-counter swaps that are not subject to exchange limits. The fund used to create shares in exchange for cash.

CFTC Rules

The Commodity Futures Trading Commission has been tightening rules on energy speculation, and Chairman Gary Gensler has asked the U.S. Congress for authority to regulate and limit bilateral swaps.

The share creation process proved more difficult than expected, Jim Stegall, manager of institutional sales for the fund, said in an interview today before the new sale was posted on the Web site. Many investors prefer swaps of a few weeks or less, while the fund wants six-month swaps.

“It’s more challenging than some people thought,” said Matt Hougan, senior editor of the Journal of Indexes. “It’s too much risk, and too much hassle for not that much profit.”

Natural gas for November delivery rose 25.2 cents, or 5.6 percent, to settle at $4.718 per million British thermal units on the New York Mercantile Exchange. Gas has fallen 37 percent in the last year.

The fund rose 36.8 cents, or 3.3 percent, to $11.39 in composite trading today on the New York Stock Exchange. It has fallen 51 percent this year.

To contact the reporter on this story: Asjylyn Loder in New York aloder@bloomberg.net.

Last Updated: October 2, 2009 19:27 EDT