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Back in August 1st, I wrote the article "Another ETN You Shouldn't Be Buying". In this article, I explained why investors should stay clear of PowerShares DB Agriculture Double Short ETN (AGA), given the huge premium it traded for over its intrinsic value.

This was a similar situation to where both the iPath DJ-UBS Natural Gas TR ETN (GAZ) and the VelocityShares Daily 2x VIX ST ETN (TVIX) had been in the past, and those two situations also ended the same way. Eventually the market price got substantially closer to its intrinsic value.

The same thing happened to PowerShares DB Agriculture Double Short ETN. Since my article, the ETN drifted, losing premium, until it finally imploded today. As I write this AGA trades at $12.40, down 11.3%, while its intrinsic value stands at $12.19, so the premium is down to just 1.7%.

The most amazing thing

The most amazing thing here - and the same thing happened with GAZ - was that whoever bought the AGA ETN when it was trading at a huge premium, was actually right regarding the movement of the underlying. After all, when I wrote my article, the intrinsic value was at $10.75, and today it's at $12.19, so the agricultural commodities tracked by the ETN did go down in price, leading to an increase in intrinsic value (since the ETN moves inversely to those commodities). And yet, because of the mispricing, anyone buying the ETN would have seen losses, since its price went from $14.71 to $12.40 today.

Again, the warning made sense: do not buy ETF/ETNs which trade at huge premiums to intrinsic value just because their issuers stopped issuing units temporarily!

You can check the intrinsic value for ETFs/ETNs simply by searching for ^{ETF/ETN ticker}-iv (for example ^AGA-iv) on Yahoo Finance, or X{CEF ticker}X for CEFs (for example XPGPX). Alternately, you can also usually check the intrinsic value/NAV by going to the issuer's website.

Conclusion

You should never buy into an ETF, ETN or CEF without having an idea of where it's trading when compared to its intrinsic value or net asset value. Sure, sometimes there are good reasons for a fund to trade at a discount or premium, but more often than not, it's simply a mispricing which gets corrected over time, defeating the original intention of owning the asset.

That is, if one can't find a specific reason for a fund to deviate from its intrinsic value - like a sustainable means for the fund to produce outstanding results which can't be replicated outside that fund - then one should consider any excursion of more than 2-5% above the intrinsic value to be irrational and not buy the fund. It is then preferable to find another fund which tracks the same underlying and has no such mispricing.

Source: Another ETN Bites The Dust