JP Morgan Sets Share Limit On MLP ETN, AMJ
June 18, 2012
(Updated in paragraph seven to add that J.P. Morgan spokesman declined to elaborate on the AMJ decision.)
J.P. Morgan Chase, the bank behind the ETP market’s single-biggest ETN, has decided to limit shares of that super-popular security, the JPMorgan Alerian MLP ETN (NYSEArca: AMJ), in what looks eerily similar to the halting of creations of shares on a VelocityShares ETN early this year.
Credit Suisse, the bank behind the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX), halted creations in February on the ETN after TVIX had quickly ballooned in size, making it next to impossible for the sponsor to reliably hedge a position that was growing so rapidly.
AMJ, like TVIX, has grown in size rather quickly, as investors have flocked to securities that serve up healthy yields at a time when official short-term interest rates are near zero. AMJ ended Friday’s session with about $4.27 billion in assets, or 17 percent more than the ETN’s assets at the end of 2011, according to data compiled by IndexUniverse.
TVIX began trading at a premium not long after creations were halted, but that premium collapsed after Credit Suisse partially resumed creations about a month later in a stealthy manner that caught some in the market by surprise. Pointedly, J.P. Morgan warned in a press release that both could happen with AMJ too – namely that a premium could develop and that that premium could evaporate.
Under the AMJ decision, the number of shares of the ETN will be allowed to peak at 129 million, for a total outstanding amount of just over $4.69 billion based on AMJ’s closing price of $36.39 on Wednesday, June 13, J.P. Morgan said in the press release late last week. The company filed a copy of the release with the Securities and Exchange Commission.
As of that June 13 date, the ETN had just shy 118 million shares, valued of $4.29 billion, the company said. That figure excludes 2.5 million shares held by a JPMorgan Chase affiliate for secondary market purposes. That basically means that, using June 13 as a benchmark, the number of AMJ shares can rise another 9 percent before the creations halt takes effect.
“Due to market supply and demand, the price of the ETNs may trade at a premium above their indicative note value,” J.P. Morgan said in the press release. “Any ETN price premium may subsequently decrease resulting in financial loss to sellers who paid this price premium,” the company said. A spokesman declined further comment when contacted by IndexUniverse.
“ETN investors should always consult their financial advisors before purchasing or selling ETNs, especially ETNs with premium characteristics,” the press release said.
J.P. Morgan said it will make updated information about the number of AMJ shares issued and outstanding at www.jpmorganetns.com or by giving investors access to members of the JPMorgan Alerian ETN team at 1-800-576-3529.
The company’s decision was detailed in a regulatory filing dated June 14.
Like the ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY) that benefited from the TVIX halted-creations drama in February, it seems a fair probability that MLP ETFs stand to gain from AMJ’s creations-ceiling travails.
AMLP … And Beyond
Indeed, if AMJ ends up closing to new investors, the few but growing number of MLP ETFs on the market are likely to benefit, beginning with the biggest of them all, the $3.21 billion Alerian MLP ETF (NYSEArca: AMLP).
In all, 11 exchange-traded products focused on the MLP space are listed in the U.S., though eight of them are ETNs, according to IndexUniverse’s “ETF Finder.”
AMJ and AMLP cost the same, at 0.85 percent per year, though the two newer MLP ETFs have been priced more competitively.
For example, the Yorkville High Income MLP ETF (NYSEArca: YMLP) came to market in mid-March with an annual expense ratio of 0.82 percent.
Not to be outdone, the Global X MLP ETF (NYSEArca: MLPA, launched on April 18 with a Vanguard-esque price of just 0.45 percent a year.
So Much For The ETN Tax Advantage
ETNs a number of significant tax advantages, which hold true even when they target MLPs – namely that holders are taxed once at their normal rate, no matter how long the holding period.
MLP ETFs are another story. Holders of a security like AMLP are effectively taxed twice – once at the corporate level and a second time at the individual level, making the tax hit quite a bit bigger than on an ETN.
That explains the outsized success of a security like J.P. Morgan’s AMJ.
But closing of creations is solely an ETN problem – making the news about AMJ seem like perhaps the whole “value proposition” of an MLP ETN may, in the end, be just be too good to be true.