JPMorgan Caps Shares of Alerian MLP ETN

Obviously, the big news from JPMorgan Chase this week was Chief Executive Officer Jamie Dimon apologizing to the Senate Banking Committee for his firm’s recent multibillion-dollar trading loss. And while not nearly as momentous as the Dimon hearing, JPMorgan also released some highly unusual news to ETF Land.

The firm on Thursday put a limit on the number of shares it’s willing to create for its Alerian MLP Index ETN (AMJ), essentially making the exchange traded note act like a closed-end fund. JPMorgan capped maximum issuance of shares at 129 million exchange traded notes. As of June 13, JPMorgan Chase had issued 117.95 million ETNs with an aggregate market capitalization of $4.29 billion based on the $36.39 closing price.

Limiting the number of shares means that the ETN will not allow creation units once that number is met. This turns the ETN from an open-end investment vehicle into one that acts like a closed-end fund. This occurs because the arbitrage mechanism that allows market makers to create or sell shares to capture the difference between the indicative value and the price at which the share trades is no longer available. Unable to create shares, market makers are less likely to take on the risk of shorting the shares. Thus, the price of the ETN may trade at a premium or discount to its indicated value depending on the demand for the notes. Of course, if shares are redeemed, the ETN can later create more shares until the limit is hit again.

MLPs, or master limited partnerships, are limited partnerships that invest in natural resources, or companies that provide services such as pipeline companies that transport oil or natural gas. These companies offer large dividends and have been very popular since the fiscal crisis. Over the past 18 months assets in exchange traded products that hold MLPs has grown from nearly nothing to about $7.55 billion. Nearly all of that inflow sits in two products, AMJ, which has $4.2 billion in asset under management, and the ALPS Alerian MLP ETF (AMLP), with $3.25 billion.

“When AMJ reaches the maximum threshold, we will closely monitor the availability of AMJ notes available in stock loan as well as any premium in the funds pricing on the secondary market,” said Chris Hempstead, director of ETF execution services at Wallach Beth Capital. “This could bode well in the short term for existing holders of AMJ as the fund will likely trade at a premium once the creation facility is shut down. Early investors would not have expected this so it’s a win for them. That being said, once this happens I expect investors looking at MLP ETPs will be drawn away from the AMJ ETN and towards [other ETNS].”

Competing ETNs include the ALPS product as well as recent launches such as the Yorkville High Income MLP ETF (YMLP), with just $37 million in assets, and the Global X MLP ETF (MLPA), which has only $5 million.

Hempstead says because these ETNs will continue issue creation units, they will continue to trade close to their indicative values. This will make them more attractive investments as AMJ’s share price diverts from its indicative value.

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High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

“This looks to be an exit trade from this asset class,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital in a note, rather than a move to receive delivery of actual bonds.

Specifically, Hempstead’s desk has been very active in SPDR Barclays Capital High Yield Bond ETF (JNK), which dropped 1.3% to $38.19; iBoxx $ High Yield Corporate Bond Fund (HYG), which fell 1.4% to $87.59; PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB), down 0.4% to $18.46, and SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), down 0.6% to $29.70.

After a redemption of about $725 million in the SPDR Barclays Capital High Yield Bond ETF last week, allegedly for delivery of actual bonds, Hempstead says the pace of selling in high yield ETFs needs to be closely monitored.

So far this year, each of these funds has seen a significant increase in assets, for a total of more than $6 billion year-to-date. With the iBoxx fund holding $14.8 billion in assets under management, the SPDR high yield ETF holding $11.2 billion, the PowerShares ETF at $943 million and $119 million in the SPDR short-term high yield, all the funds have about doubled their assets since January 2011, says Hempstead.

“We are watching closely to see how well the Street can absorb a short-term exit strategy from these funds,” said Hempstead in a note. “How would the fixed income world respond to a heavy and swift sell-off in an ETF product space that has seen a steady inflow of assets for almost 18 months?”

He adds the products have started trading at a discount to their respective NAV, which is not uncommon, but they have a tendency to trade at a premium for longer periods than at a discount.