The steep declines over the past week in two exchange traded products that saw hefty premiums collapse are another reminder that investors always need to understand what they’re buying.
Two exchange traded notes — VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) and iPath Dow Jones-UBS Natural Gas ETN (NYSEArca: GAZ) – have sold off as their premiums to net asset value have been unwound.
Premiums had built up in the products after the ETNs suspended the creation of new shares. TVIX resumed new share issuance last week. [TVIX Fallout Lingers for Volatility Products, ETNs]
Essentially, the ETNs were trading similar to closed-end funds because stopping the creation of new shares the hindered market makers’ ability to arbitrage away any differences between the share price and the net asset value.
Halting share issuance also makes it more difficult to find shares to borrow and short the ETN. Traders that short securities are betting that the price will fall.
In other words, the ETNs were being influenced by factors outside the movements of the markets they’re designed to track. [Natural Gas ETN Tumbles as Premium Unwinds]
There are other exchange traded funds and notes that are trading at premiums and discounts, although most of the worst offenders are relatively small in terms of assets under management.
The following funds were trading at a discount of at least 10% as of March 26, according to Morningstar:
The following funds were trading at a premium of at least 10%:
- UBS E-TRACS Long Platinum ETN (NYSEArca: PTM)
- Columbia Intermediate Muni Bond Strategy Fund (NYSEArca: GMMB)
- iPath Dow Jones-UBS Natural Gas ETN
- iPath Short Extended Russell 1000 ETN (NYSEArca: ROSA)
It’s important to remember that premiums and discounts are fluid and can change from day to day. The data above is based on a snapshot from March 26.
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.