An exchange traded note indexed to natural gas futures is trading at a premium of more than 100% to indicative value, setting investors up for potential losses unrelated to the movement of the commodity’s price.

Last month’s meltdown in VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) was a lesson for investors on what can happen when an exchange traded product sees a premium develop. TVIX issuer Credit Suisse had suspended the creation of new shares. This interrupts the so-called arbitrage mechanism that helps keep the share price in line with fair value. The ETN plunged in value when the premium that had built up finally collapsed. [What Really Happened with TVIX]

Now, the share price of iPath Dow Jones-UBS Natural Gas ETN (NYSEArca: GAZ) is more than double the indicative value. In other words, investors could see a repeat of TVIX if the GAZ premium breaks down. Barclays, the issuer for GAZ, suspended new share issuance in 2009.

The key point for investors is that when an ETF or ETN halts new share issuance, the product canbe influenced by factors other than the movement of the market it tracks.

“People are trying to pick the bottom in natural gas right now, not realizing that this vehicle they’re choosing to invest in might be broken,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus, told Bloomberg News in a report earlier this month. [Natural Gas ETN Premium: Don’t Get Stepped on by GAZ]

GAZ and an ETF that invests in natural gas futures, U.S. Natural Gas Fund (NYSEArca: UNG), were diverging in price on Monday. UNG was down 1.2% in early trading, while GAZ rose 0.2%.

GAZ has a market cap of $30.8 million, according to Barclays.

iPath Dow Jones-UBS Natural Gas ETN

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