AMJ At A Premium, But Will It Last?
June 22, 2012
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(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 liquidity.)
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 premium.
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 shares.
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 share-creation limits.
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.