JP Morgan has announced a size limit for a popular exchange traded note designed to track master limited partnerships. Halting the issuance of more shares could result in the ETN trading at a premium to indicative value, similar to a closed-end fund.
The move is a reminder that exchange traded products can cease closely tracking their index when the sponsor stops creating additional shares.
For example, VelocityShares Daily 2X VIX Short-Term ETN (TVIX - News) 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]
JP Morgan in a recent press release said the maximum number of JPMorgan Alerian MLP Index ETN (AMJ - News) shares authorized for issuance will be 129 million. [Be Careful When Stretching for Yield with MLP ETFs]
According to the latest daily report on AMJ from JP Morgan, there are 117.95 million shares outstanding.
ETFs that invest in master limited partnerships, or MLPs, have been popular with income-seeking investors. [An Overview of MLP ETFs]
JP Morgan warned the cap for AMJ may result in the shares value deviating from net asset value.
“It is possible that the maximum issuance authorization … may influence the market value of the ETNs,” JP Morgan said in the press release. “Due to market supply and demand, the price of the ETNs may trade at a premium above their indicative note value. Any ETN price premium may subsequently decrease resulting in financial loss to sellers who paid this price premium. ETN investors should always consult their financial advisors before purchasing or selling ETNs, especially ETNs with premium characteristics.”
The iPath Dow Jones-UBS Natural Gas ETN (GAZ - News) is another example of an exchange traded product that is trading at a premium. Barclays, the issuer for GAZ, suspended new share issuance in 2009. GAZ was recently trading at a premium of more than 50% to indicative value. [ETFs for a Natural Gas Rebound]
JPMorgan Alerian MLP Index ETN
- JP Morgan
- master limited partnerships