The slight premium in an exchange traded note indexed to master limited partnerships is a reminder that investors need to be on guard when products halt the creation of new shares.
JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) was trading at a premium of about 1% to indicative value on Tuesday.
The $5 billion ETN recently reached the limit on the number of shares outstanding set by issuer JP Morgan (NYSE: JPM).
In terms of inflows, AMJ may have had its “last hurrah” in June, says investment researcher Morningstar.
“It saw a $574 million inflow, but the bank has halted new share creations given the difficulty in hedging out MLP exposure,” Morningstar said. The premium recently rose to nearly 3% and any new investor interest in the ETN may increase the premium, it added.
Exchange traded products essentially turn into closed-end funds when the manager suspends the creation of new shares. As a result, premiums and discounts to net asset value can materialize.
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. [MLP ETN Hits Size Limit, Premium May Follow]
In June, JP Morgan announced a cap of 1.29 million shares on AMJ.
Morningstar analyst Abraham Bailin believes the cap was rooted in the provider JP Morgan’s recent significant trading losses and excess levels of risk within its broad synthetic credit portfolio.
“The end result of this development is that AMJ will not be able to complete creations, the process by which the ETN price can be brought down in line with net asset value via note issuance. With regard to the creation process, AMJ will look much like a closed-end fund, with its potential for premiums to develop. The redemption process, however, will remain unimpeded, so there is little risk of discounts developing,” Bailin wrote in a recent note.
“This added layer of complexity should not be overlooked. AMJ is likely not to operate as it had previously, and index tracking will be suspect. As long as the provider is not issuing new notes, establishing a new position here will include not only an investment on the master limited partnership space but also a speculation on the nature of the premium,” he added. “Because premiums can develop but discounts cannot, this is less of a worry to existing holders of AMJ.”
The bottom line for investors is that they need to be alert when exchange traded products stop creating new shares. They can end up paying a premium when buying the product. In other words, their returns can be affected by factors outside the movement of the underlying sector, such as demand for the product.
Other exchange traded products for master limited partnerships include:
- ALPS Alerian MLP ETF (NYSEArca: AMLP)
- Exchange Traded Concepts Yorkville High Income MLP ETF (NYSEArca: YMLP)
- First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP)
- Global X MLP ETF (NYSEArca: MLPA)
- Credit Suisse Cushing 30 MLP Index ETN (NYSEArca: MLPN)
- Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY)
- UBS E-TRACS Alerian MLP Infrastructure Index (NYSEArca: MLPI)
- UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (NYSEArca: MLPL)
- UBS E-TRACS Wells Fargo MLP Index (NYSEArca: MLPW)
- UBS E-TRACS Alerian Natural Gas MLP Index (NYSEArca: MLPG)
JPMorgan Alerian MLP Index ETN