A small exchange traded note for natural gas is trading at a premium of more than 100% because the ETN has suspended the creation of new shares.
The iPath Dow Jones-UBS Natural Gas ETN (NYSEArca: GAZ) had a daily indicative value of $2.51 a share on Friday, while the share price closed at $5.91.
Why the massive premium? Because with the ETN not issuing new shares, it is operating like a closed-end fund, which can see premiums and discounts based on demand.
ETNs are debt instruments issued by financial institutions that promise to pay the return of an index, minus fees and taxes. The note is issued by Barclays and is designed to track the performance of natural gas futures. [Five Things to Know About Commodity ETFs]
The ETN has been outperforming U.S. Natural Gas Fund (NYSEArca: UNG) due to the premium to NAV.
The iPath Dow Jones-UBS Natural Gas ETN is up 56.8% year to date according to Morningstar, compared with a 28.8% loss for U.S. Natural Gas Fund, which is an ETF.
Exchange traded products have an arbitrage mechanism that typically keeps the share price close to NAV, but the issuance suspension in GAZ has led to the premium. Barclays halted further issuance of GAZ in August 2009, according to a press release.