Barclays ETN Rises as Investors Boost Premium in ‘Broken’ Note

A Barclays exchange-traded note that last week plunged after trading as much as 134 percent above the value of the natural-gas index it’s tied to is regaining some of the premium today.

The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN has increased 15.4 percent since March 29, even as its benchmark index added 1.03 percent, according to data compiled by Bloomberg. Barclays suspended issuance of new shares in August 2009, which may cause the notes “to trade at a premium or discount in relation to their indicative value,” the bank said in a statement at the time.

The note has gained 34 percentage points of premium over its underlying index, the Dow Jones-UBS Natural Gas Total Return Sub-Index since touching a low of 56.4 percent on March 27, as buyers look for the commodity to rebound from a 10-year trough.

“People are trying to pick the bottom in natural gas right now, not realizing that this vehicle they’re choosing to invest in might be broken.” Dave Lutz, head of exchange-traded fund trading and strategy who is based in Baltimore with Stifel Nicolaus & Co., said in a telephone interview today.

Regulators are examining exchange-traded notes after a Credit Suisse Group AG ETN lost more than 50 percent of its value in two days last month. The Barclays note is trading at the highest premium to its index among more than 1,000 U.S. exchange-traded products as of March 30, Bloomberg Data show.

Kristin Friel, a spokeswoman for Barclays in New York, declined to comment.

Price Gyrations

The U.S. Securities and Exchange Commission is reviewing the price gyrations involving the Credit Suisse VelocityShares Daily 2x VIX Short-Term ETN, a person familiar with the matter said, who asked not to be identified because the inquiry isn’t public. The Zurich-based bank had stopped creating new shares of the ETN on Feb. 21, unhinging the note’s price from the index and leading to a premium over the indicative value that peaked at 89 percent on March 21.

Credit Suisse is cooperating with regulatory authorities, said Katherine Herring, a spokeswoman for the Zurich-based bank on March 30.

The Barclays ETN traded at more than a 100 percent premium for almost three weeks starting March 5, while the index it’s linked fell for the previous five days. The note traded at a 93.4 percent premium to the index today.

Natural gas futures dropped to a 10-year low in New York, falling within 7 cents of $2 per million British thermal units, on forecasts of moderating temperatures that may limit heating demand.

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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE