MLP ETN Hits Size Limit, Premium May Follow
June 21st 2012 at 11:15am by John Spence
A popular exchange traded note for master limited partnerships has reached the limit on the number of shares outstanding recently set by issuer JP Morgan (NYSE: JPM). As a result, the ETN may begin trading at a premium to fair value if demand remains strong, which could lead to losses unrelated to the movement of the MLP sector for unsuspecting investors.
As of June 20, JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) had 129 million shares outstanding, which JP Morgan recently set as the maximum. [Cap in Master Limited Partnership ETN May Trigger Premium]
Exchange traded products tracking MLPs have been popular with investors seeking income and diversification. [What You Need to Know About MLP ETFs]
Other exchange traded products for this asset class include Alerian MLP ETF (NYSEArca: AMLP), Yorkville High Income MLP (NYSEArca: YMLP), Global X MLP (NYSEArca: MLPA) and UBS E-TRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI).
Although they are often lumped together, ETNs have different credit risks than exchange traded funds. ETNs are debt securities issued by financial institutions that promise to pay the return of a particular index, minus fees and taxes. In other words, investors are exposed to the risk that the ETN issuer goes belly-up. [ETNs are Not ETFs]
JP Morgan’s decision to place a size limit on AMJ is another warning sign for ETN investors.
For example, VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) quickly lost 50% of its value earlier this year when its premium collapsed. TVIX issuer Credit Suisse in February suspended the creation of new shares due to size limits. [What Really Happened with TVIX]
ETF and ETN shares tend to trade very close to the value of the underlying securities. However, premiums and discounts can develop in exchange traded products when sponsors halt the creation of new shares. This causes the so-called arbitrage mechanism to break down. As a result, shares can deviate from indicative value based on buying and selling pressure for the ETF or ETN. [Natural Gas ETN Premium Tops 100%]
Investors added more than $400 million to AMJ on Wednesday, according to IndexUniverse.
AMJ had total asssets of $4.76 billion as of June 20, according to JP Morgan.
AMJ was trading at a very slight premium to indicative value in midday action Thursday. Shares were trading at $36.73 at last check, compared with an indicative value of $36.71.
JPMorgan Alerian MLP Index ETN
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.