Daily ETF Flows
Daily ETF Flows: AMJ Reaches Creations Limit
June 21, 2012
(Updated to make clear J.P. Morgan is holding about 11 million AMJ shares in inventory, and that it looks to be the likely party behind the large AMJ creations.)
Investors – perhaps even one investor -- poured $407.9 million into the JPMorgan Alerian MLP ETN (NYSEArca: AMJ) yesterday, a development that appears to have pushed AMJ’s outstanding float to a ceiling of 129 million shares set a week ago by the note’s sponsoring bank, J.P. Morgan Chase.
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.
Reaching that creations ceiling is likely to make AMJ trade at a premium if demand for the security remains as brisk as it has in the past few years. It also recalls the fate of the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX). That ETN’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 possibility of AMJ trading at a premium could attract speculators and make the ETN’s current holders quite happy for now. But it could also be a boon for other MLP ETNs on the market, and MLP ETFs, which don’t run the same risks as ETNs in terms of imposing share-creation limits. The biggest of those competing ETFs, the Alerian MLP ETF (NYSEArca: AMLP) has $3.31 billion in assets.
J.P. Morgan Holding 11 Million AMJ Shares
But perhaps more importantly, J.P. Morgan told the world on its website that it now holds about 11 million AMJ shares in its own inventory.
That means that J.P Morgan itself is probably behind the huge creations we picked up on, and that just 118 million AMJ shares are publicly held.
It also means that while all 129 million of the AMJ shares that are allowed under the limit it set last week are now created, J.P. Morgan can keep releasing shares of AMJ to the market to meet demand and to help keep a premium from developing.
That’s exactly what some industry source suspect J.P. Morgan will do, likening the process to doing creations, but in the secondary market.
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 – requires the bank to keep the security operating as advertised, lest it become the next TVIX or the latest poster child for suspicious and self-serving behavior on Wall Street.
Since J.P. Morgan isn’t talking, it’s up to investors to monitor the ETN for any divergence from its net asset value and to check out that link included above. (Click on the PDF that says “Daily Report” to get a running total of just how many AMJ shares the company is holding.)
Running The Numbers
Again, J.P. Morgan hasn’t commented on the latest development -- apart from both the press release it issued last week announcing AMJ’s 129 million share limit to the world as well as the fresh information about AMJ it posts on its website.
In that press release a week ago, it laid out a calculation, saying that at the ETNs $36.39 closing price on June 13, the 129 million share limit would be reached when assets reached just over $4.69 billion.
As it happened, taking IndexUniverse’s calculation of AMJ’s $4.76 billion in assets as of yesterday’s close, then dividing that figure by yesterday’s closing price of $36.91 yields exactly 129 million shares – hence our conclusion that the share threshold had been reached.
An industry source confirmed that such a calculation would be a logical way to verify if AMJ’s share limit had indeed been reached.
Industry sources say the bank imposed the 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.
Net ETF Flows Positive As Stocks Ease
Overall, net ETF inflows yesterday amounted to $2.23 billion, and total U.S.-listed ETF assets remained steady from Tuesday, June 19 at around $1.181 trillion, according to data compiled by IndexUniverse. Those inflows helped offset stock prices that, for the most part, edged lower yesterday.
Indeed, equities were mostly a touch lower yesterday. Investors were disappointed the Federal Reserve didn’t decide to launch into aggressive new monetary stimulus measures at the end of its two-day policy meeting to stoke a global economy that is starting to feel the effects of all the debt-related turmoil in the eurozone and slowing growth in China.
The Dow Jones industry average dipped 12.94 percent, or 0.01 percent to end the session at 12,824.39. The S&P 500 Index also dipped, though the tech-heavy Nasdaq added 0.69, or 0.02 percent, to end the day at 2,930.45.
Yesterday’s least-popular fund was the SPDR S&P 500 ETF (NYSEArca: SPY), which suffered redemptions of $203.2 million, leaving the world’s biggest exchange-traded fund with $104.59 billion in assets at the end of yesterday’s session.
Top 10 Creations (All ETFs)
Bottom 10 1-Day Performers, Excluding Leverage/Inverse Funds and <1,000 Shares Traded
Disclaimer: All data as of 6 a.m. Eastern time the date the article is published. Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.