A JPMorgan Chase & Co. (JPM) exchange- traded note tied to oil assets reached a record premium over its underlying index after the bank limited shares of the security.
The JPMorgan Alerian MLP Index ETN (AMJ), under the ticker AMJ, closed 2.7 percent above its underlying index on June 29, the highest level since its inception in April 2009, according to data compiled by Bloomberg. The New York-based bank’s ETN, the largest in the U.S. at $5 billion in market capitalization, traded at a 5.3 percent premium at 1:48 p.m. in New York, before retreating to 2.5 percent at 3:50 p.m.
JPMorgan limited share creation to 129 million on June 14, a threshold reached six days later, raising concern that the note could become unhinged from its linked index, as occurred in March with an ETN (TVIX) issued by Credit Suisse AG. The AMJ note, which tracks partnerships that don’t pay federal income taxes and rely on assets such as oil pipelines to generate cash flow, has added 35 million shares this year, an increase of 37 percent, according to data compiled by Bloomberg.
“Everyone expected AMJ to trade at a premium once the cap was announced because investors are scrambling for yield,” said Samuel Lee, an exchange-traded product analyst for Morningstar Inc. in Chicago. “I don’t expect to see crazy, TVIX-level premiums in this product because that premium becomes too attractive and people will start to short AMJ,” he said, referring to the ticker of Credit Suisse’s volatility note.
Elizabeth Seymour, a spokeswoman for JPMorgan in New York, declined to comment.
The Alerian MLP-linked security was the fourth-most traded U.S. ETN on June 29, at 2,717,800 shares, compared with less than a third that volume on the day before the announcement that its size would be restricted.
On Feb. 21, Zurich-based Credit Suisse stopped issuing shares of an ETN tied to the VIX, as the Chicago Board Options Exchange Volatility Index is called. A month later, the TVIX note began diverging from its underlying index to trade at a premium of as much as 89 percent. Over two days in March, it lost more than 50 percent of its value, and the U.S. Securities and Exchange Commission is probing price gyrations in the security, a person familiar with the matter said in March.
The JPMorgan ETN, which has a total return of 10 percent for the last year, makes up more than a quarter of the ETN market. It tracks a gauge of 50 publicly traded master limited partnerships and matches dividends from the Alerian MLP Index minus a 0.85 percent management fee, according to a prospectus filed with the SEC. The partnerships typically invest in assets ranging from pipelines to ships transporting commodities.
Investors who want to bet on master limited partnerships can choose from at least nine other exchange-traded products. UBS AG and Credit Suisse offer ETNs, and ALPS Advisors Inc. sells the largest exchange-traded fund tied to an MLP index.
ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand typically doesn’t affect the price since the ETNs track the performance of an index.
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