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AMJ, A Year Later, Again At A Premium

Olly Ludwig

The JPMorgan Alerian MLP ETN (AMJ), the biggest exchange-traded product focused on the yield-rich master limited partnership space, has again been trading at a premium, nearly a year after it went to a premium in the wake of its backing bank’s decision to halt creations.

AMJ again began trading at a premium last week, according to a story in the Wall Street Journal—ostensibly because of what appears to be a "short squeeze" related to maneuverings in the options market. The ETN was trading at 4 percent above its net asset value on Tuesday after reaching a record 4.3 percent premium on Friday, the article said. That’s more than the 2.7 percent premium briefly reached in June 2012.

The sponsor, J.P. Morgan, never officially explained why it had halted AMJ creations on June 14 last year when it set a ceiling of 129 million shares. However, ETF market sources have told IndexUniverse it was likely because the huge ETN had been growing rapidly and to such a size amid demand for its rich yield that it was making hedging the ETN’s exposure too difficult and risky. The ETN had about $4.7 billion in assets at that time and now has $5.77 billion, according to data compiled by IndexUniverse.

The halting of share creations means that an ETN can behave like a closed-end fund wherein demand for shares of a given product exceeds available supply, sending the market price above NAV. AMJ’s price ended Tuesday’s session at $47.11 a share, down 14 cents. It has a yield of about 4.5 percent.

At the time of the creations halt last year, AMJ began trading at a premium within two days , but soon converged again with its NAV. About a month later and sensing opportunity, UBS rolled out the ETRACS Alerian MLP Index ETN (AMU), which is exactly like AMJ, save for the fact that its annual fee is 5 basis points cheaper than AMJ’s at 0.80 basis points, or $80 for each $10,000 invested. AMU has gathered $60 million in assets.

The reasons behind AMJ's premium are a bit foggy, not least because data on J.P. Morgan’s website indicated it was holding a sizable inventory of shares at the time of the 4.3 percent spike on Friday. That inventory can be used to prevent premiums from taking shape by feeding the secondary-market demand with shares from that inventory.

The idea of an options-market tie-in has thus come into focus, according to the Journal story, which cited traders.

In early April, volume in bearish AMJ put-options spiked to the highest number on record, with a large number of bearish put-options that grant the right to sell AMJ shares at $44 changing hands. That day, the ETN traded around $45 a share.

The thinking is that the player who took the bullish side of that put order would be vulnerable to losses resulting from a big drop in AMJ’s price and probably sold AMJ shares short to mitigate risks. That options players thus started scouring the market for AMJ shares to short. The upward pressure on AMJ's market price was related to buying pressure from players eager to lend newly acquired shares to the the short-seller, the hallmarks of a so-called short squeeze.

The danger of a premium is principally to those who buy when the ETN is trading above its NAV and end up selling after the premium collapses. Such losses, to be clear, would have nothing to do with the value of underlying investment; rather, they would reflect structural flaws in the actual investment vehicle.


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