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.
Posted in Business, Dividends, ETFs, Global X, J.P. Morgan Chase, Stock Market, stocks, Wall Street
Tagged ALPS Alerian MLP ETF, AMJ, AMLP, Chris Hempstead, Global X MLP ETF, J.P. Morgan Alerian MLP Index ETN, Jamie Dimon, master limited partnerships, MLPA, MLPs, Wallach Beth Capital, YMLP, Yorkville High Income MLP ETF
- Morgan Stanley’s Dominic Maister, winner of the 2009 award for contribution to the ETF sector award and head of the Best ETF Research Team, moderated the ETF Roundtable. Maister says ETF assets grew 47% in 2009. Of that total asset growth, 50%, or $120 million, comes from net cash inflows. The other half from increased valuations. Equity ETFs see $30 billion in net inflows, while equity mutual funds see $9 billion in net outflow.
- State Street Global Advisors’ director of ETF global capital markets, says the main driver of ETF growth the last few years was fixed income ETFs. From six fixed income ETFs in 2006 to 92 today. This has led to significant growth of full-service dealers using ETFs in portfolio models. Only 14% of institutional investors use ETFs, but they make up 50% of the assets. This would appear to mean there’s lot of growth potential left among institutions. Quigg said, “Institutions see ETFs as an investment tool, not a choice, and use ETFs to solve problems.” He said this usage will increase over the next 5 to 10 years.
- Gabriel Hammond, the chairman and founder of Alerian, the index provider for the J.P. Morgan Alerian MLP Index ETN (AMJ). MLP stands for master limited partnerships, a company with a different tax structure than a public corporation. These often focus on the energy and oil sector. He says the big advantage ETFs have over closed-end funds is their liquidity and transparency. Probably most important, investors could pay up to 200 basis points more than an ETF to own the top ten holdings in the MLP space in an closed-end fund.
Posted in Business, ETFs, J.P. Morgan Chase, Morgan Stanley, State Street, Stock Market, stocks, Wall Street
Tagged Alerian, AMJ, Capital Link, Dominic Maister, fixed income, Gabriel Hammond, J.P. Morgan Alerian MLP Index ETN, Kevin Quigg, MLP
J.P. Morgan Chase is jumping into the ETF business.
In two SEC filings dated March 10, J.P. Morgan filed for exemptive relief for its first ETFs ever. The filings ask for relief for both index-based and actively managed ETFs.
The passive funds appear to be two bond-index ETFs. One will track an index of investment grade municipal bonds with 1 to 12 years to maturity and the other will track investment grade corporate bonds with an issuance of at least $300 million.
For actively managed funds, the filing asked for exemptive relief for funds that could hold stocks, bonds, open-end funds, closed-end funds and unit investment trusts. The strategy for J.P. Morgan’s first actively managed ETF would be to invest in about 300 large-cap stocks across many sectors. The actively managed fund would have a fundamental weighting. The fund would “overweight inexpensive stocks with improving fundamental characteristics and underweight expensive stocks with deteriorating fundamental characteristics.”
Currently, the bank runs the J.P. Morgan Alerian MLP Index ETN (AMJ). This exchange-traded note isn’t a true ETF, but rather an unsecured debt sold to investors. However, J.P. Morgan wasn’t the fund’s sponsor, Bear Stearns was. J.P. Morgan acquired the ETN when it bought Bear Stearns in 2008. The AMJ tracks the market of master limited partnerships. MLP are partnerships that sell shares like a public company. Typically they’re involved in the business of transporting oil and natural gas.
The filings were first reported on the news feed at ExchangeTradedFunds.com.
Posted in Business, ETFs, J.P. Morgan Chase, Stock Market, stocks, Wall Street
Tagged actively managed ETF, AMJ, exchangetradedfunds.com, J.P. Morgan Alerian MLP Index ETN, master limited partnerships, SEC filings