Last week, JPMorgan (NYSE:JPM) announced that it would no longer issue new shares of the JPMorgan Alerian MLP Index ETN (NYSE:AMJ), the popular exchange-traded product that invests in master limited partnerships.
This action might fuel concerns that AMJ is vulnerable to a collapse similar to those suffered by the VelocityShares Daily 2x VIX Short Term ETN (NYSE:TVIX) and the iPath DJ-UBS Natural Gas ETN (NYSE:GAZ) earlier this year.
However, AMJ is not in the same situation today that TVIX and GAZ were prior to their March downturns.
With both of those ETNs, the suspension of new issuance prevented investors from arbitraging away the difference between the market value of the ETF and the net asset value of the underlying portfolio. As a result, both began trading at a premium to net asset value, just as closed-end funds do.
When Credit Suisse (NYSE:CS) announced that it would resume the issuance of TVIX shares in late March, the substantial premium collapsed and unsuspecting shareholders were saddled with major losses. From March 20-26, TVIX plunged from $15.13 to $5.88. GAZ, which also was trading at a premium at the time, lost more than half of its value in roughly the same interval once investors recognized the ETN was vulnerable to a similar event.
Can the same happen with AMJ? Not yet, because there is virtually no difference between the share price and the NAV.
Could it happen eventually? Absolutely, if the share price moves to a significant premium over the NAV. Whether this actually takes place is another question altogether. There are three reasons why a similar premium expansion is less likely to occur this time around:
- Investors have the recent history of TVIX and GAZ to draw from, so investors would look to take profits long before AMJ rose to a similar premium over its net asset value. ETF net asset values can be tracked on Yahoo! Finance by adding “-IV” after the ticker. The NAV ticker for AMJ, for instance, is “^AMJ-IV”.
- AMJ ($3.5 billion) is much larger than either TVIX (currently $383 million) or GAZ ($33 million), meaning that extreme inefficiencies are less likely to develop.
- AMJ is, first and foremost, a yield vehicle. A significant rise in the premium over NAV will cause the yield to go down, making the ETN less attractive and putting downward pressure on the premium.
While there’s no immediate reason to dump AMJ, there also is no shortage of alternatives given that eight other exchange-traded products invest in this space. Six of these are very thinly traded, however, while the most obvious alternative — the Alerian MLP ETF (NYSE:AMLP) — has lagged AMJ by a substantial margin due to different tax treatment. Since AMLP began trading on Sept. 1, 2010, it has gained 11.53% — about half of the 24.2% gain for AMJ in that same period.
The UBS E-TRACS Alerian MLP Infrastructure ETN (NYSE:MLPI) has tracked AMJ far better, returning 25.2% since Sept. 1, 2010. However, it too is an ETN — meaning it carries the attendant credit risk and the possibility its issuance also could be capped at some point in the future.
The bottom line: AMJ isn’t in immediate jeopardy of a TVIX-style meltdown since there is no premium at the present time. Still, anyone who owns AMJ should keep close track of the NAV-share price relationship to avoid the possibility of surprises occurring down the road.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
