(Updated to reflect that AMJ's share price is now trading at
premium to NAV, and that some sources believe investors may be
willing to pay a premium for AMJ in exchange for its high
Investors-it looks like one investor-poured $407.9 million into
the JPMorgan Alerian MLP ETN (NYSEArca:AMJ) last week, a
development that lifted AMJ's outstanding float to the 129
million-share ceiling set a week ago by the note's sponsor, J.P.
Morgan Chase and brought the ETN to the brink of trading at a
The huge ETN has since moved into a premium to its net asset
value -- 2 percent above NAV on Wednesday morning and ending at a
1.2 percent premium to NAV on Tuesday, June 26. But will the
premium have staying power?
It's certainly possible. There are now 129 million AMJ shares
issued, and that is indeed the limit that the biggest U.S. bank by
assets set last week.
But of possibly critical importance, J.P. Morgan said on its
website that it was holding about 11 million AMJ shares in its own
inventory as of late last week. That means that J.P Morgan itself
is probably behind the big creation, and that fewer than 129
million AMJ shares are publicly held. However, that number in
inventory has fallen in past few days by more than 40 percent,
meaning investors are snatching up AMJ shares.
AMJ, which focuses largely on energy-related master limited
partnerships such as pipelines, has grown in size rather quickly
because it's paying a hefty dividend at a time when official
short-term interest rates are near zero. AMJ ended Wednesday's
session with $4.76 billion in assets, or 30 percent more than at
the end of 2011, according to data compiled by IndexUniverse.
AMJ trading at a closed-end-fund-like premium to NAV recalls the
fate of the VelocityShares Daily 2X VIX Short-Term ETN
(NYSEArca:TVIX). TVIX's sponsor, Credit Suisse, halted creations in
February, and TVIX quickly began trading at a premium until
creations were partially resumed a month later.
The whole episode left a bad taste in some investors' mouths,
which led us to write a piece about it titled "Did The TVIX News
Leak?" when the premium evaporated even before the official news of
resumed creations was completly public. The TVIX affair thus makes
us wonder just what J.P. Morgan plans to do with all those
On a guardedly positive note, speculators pushing AMJ to a
premium could make the ETN's current holders quite happy.
An AMJ premium could also be a boon for the other eight
competing MLP ETNs listed in the U.S. that you can find on
IndexUniverse's "Fund Finder."
Additionally, it could also help the growing number of MLP ETFs
that don't run the same risks as ETNs in terms of imposing
The biggest of those competing ETFs, the Alerian MLP ETF
(NYSEArca:AMLP) has $3.31 billion in assets. AMLP has thrived in
spite of downside tax consequences ETNs don't have.
What's J.P. Morgan's Plan?
So, the question is:What does J.P. Morgan plan to do with those
11 million shares? The big bank isn't talking-apart from the press
release it put out on June 14 announcing the 129-million-share
limit and apart from the updates it provides on its website.
J.P. Morgan could keep releasing shares of AMJ to the market to
meet demand and to help keep a premium from developing, or at least
developing too quickly.
Some industry sources suspect that's exactly what J.P. Morgan
will do, likening the process to doing creations, but in the
But will the bank wait for a premium to build before releasing
those shares? The fact that AMJ has been trading at a premium since
last Friday isn't an encouraging sign.
Still these sources don't think J.P. Morgan will be looking to
cynically exploit a premium in the name of raising trading profit.
Moreover, they think some investors think paying for AMJ at a
slight premium might be worth it considering the ETN is so liquid
and trades with such tight bid/ask spreads.
More broadly, they argue that managing an ETN as big as AMJ-it's
assets amount to a about quarter of all U.S.-listed ETN
assets-all-but requires the bank to keep the security operating as
advertised, lest it become the latest poster child for suspicious
and self-serving behavior on Wall Street. That's all the more true
given the $2 billion "London Whale" issue the bank is facing
But even if J.P. Morgan works to ethically and carefully manage
the possibility of a premium developing, that doesn't mean a
premium in AMJ won't eventually develop once those 11 million
shares in inventory get used up. The fact that the ETN is at a
premium reflects the possibilty that the market considers a premium
inevitable, given the brisk demand for the security in the
past few years.
If AMJ does start trading at a premium, that's probably great
news for competing MLP ETNs and ETFs aren't identical to AMJ,
but they're close enough to serve a similar purpose to investors
looking for more nuanced equities-like exposure in their
portfolios. That's particularly true of the ETNs, which have the
same tax treatment as AMJ.
Whether J.P. Morgan ever resumes creations is anyone's guess,
but it's a question that on anyone's mind who's watching this AMJ
scenario play out.
Industry sources say J.P. Morgan imposed the 129 million share
limit to make management of the security a finite task-the scope of
which could be fully grasped by both investors and the ETN's
managers at all times.
A trading desk facing mounting hedging tasks as an ETN grows
rapidly could lose control of risk management mechanisms-a concern
that was widely voiced at the time Credit Suisse halted creations
of TVIX in February.
Whatever validity to Credit Suisse's concerns, as noted, the
whole episode gave a lot of people pause. The takeaway is that
investors need to pay attention.
Investors should monitor AMJ for any divergence from its NAV by
staying on top of how quickly that 11-million-share buffer is
shrinking by checking out J.P. Morgan's website regularly.
(Click on the PDF that says "Daily Report" to get a running total
of just how many AMJ shares the company is holding.)
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