A popular master limited partnership exchange traded note has started to trade at a premium to its net asset value once again, highlighting additional risks associated with the ETN structure.
The JPMorgan Alerian MLP Index ETN (AMJ) was trading at a premium of around 3% late last week, with some traders attributing the run up to large option trades. The ETN had set an all-time high closing premium of 4.3%, according to the MoneyBeat blog at WSJ.com.
The issuing bank of the ETN halted new share creations due to the difficulty in hedging out MLP exposure, essentially turning the ETN into a closed-end fund. Consequently, premiums and discounts to net asset values can occur.
J.P Morgan has restricted the number of shares issued at 129 million on June 14, 2012 amid rising demand for AMJ as an alternative for yields.
"It matters because you have a lack of equilibrium in the marketplace, whereby the sum of the parts is worth less than the asset as a whole," Agam Kothari, director of equity trading at Citigroup, said in the article. "When that's driven purely due to technical factors, that should always be a wake-up call to investors."
Specifically, the bank has stated that "investors that pay a premium for the ETNs could incur significant losses if that investor sells its ETNs at a time when some or all of the premium is no longer present."
Max Chen contributed to this article.