iPath's Upgraded Natural Gas ETN Play

Barclays iPath has rolled out a new natural gas exchange traded note to replace the less efficient iPath Bloomberg Natural Gas Subindex Total Return ETN (NYSEArca: GAZ).

The newly launched iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (NYSEArca: GAZB) comes with a 0.45% expense ratio, compared to GAZ’s 0.75% expense ratio.

GAZB will try to reflect the performance of the same index as GAZ, Bloomberg Natural Gas Subindex Total Return Index, which tracks the potential returns through an unleveraged investment in natural gas futures contracts.

Natural gas traders who have have previously utilized GAZ to exposure to gas prices may opt to switch into the newly launched GAZB as cheaper and more efficient alternative.

Similar to index-based exchange traded funds, ETNs also track some sort of index as part of their investment strategy. However, an exchange traded note, like the name implies, is a type of debt note that trades on an exchange. Additionally, the underwriting bank that issues ETN shares may choose to stop share creations.

For example, GAZ has been closed for creations since August 2009, which has made the ETN operate more like a closed-end fund. Consequently, GAZ is now currently trading at a 26.3% premium to its net asset value, according to Morningstar.

According to a press release, GAZ traders can swap their notes back to Barclays for shares of GAZB. GAZ traders can also continue to hold onto their positions, but Barclays warned of a number of risks, notably trading permiums or the higher cost of trading to gain exposure to natural gas prices.

ETNs are debt securities issued by financial institutions that promise to pay the return of an index, minus fees and taxes. Therefore, investors are exposed to the credit risk or the possibility the underwriting bank goes bankrupt. The note can be vulnerable if the issuer gets into financial trouble, otherwise known as a default. With an ETN, an investor can lose some or all of their investment if the ETN issuer goes under.

For more information on new fund products, visit our new ETFs category.

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