Red flag at popular ETN

Red flag at popular ETN
JPMorgan this week stopped issuing shares in its popular Alerian MLP exchange-traded note. That should be a signal for investors to monitor the situation. Here's why.
JUL 10, 2012
Advisers invested in the $4.27 billion JPMorgan Alerian MLP Index ETN (AMJ) need to start watching the fund much more closely. JPMorgan Chase & Co. stopped issuing new shares of the exchange-traded note Wednesday as the fund reached 129 million shares, the maximum number of shares allowed, according to a note on the company's ETN home page. By no longer issuing new shares, the ETN essentially has morphed into a closed-end fund. That means it no longer is likely to trade at net asset value. If a sell-off takes place in the master-limited-partnership sector, the ETN's share will probably trade at a discount. But given the demand for MLPs or, more specifically, their relatively hefty dividends, it's more likely a premium could develop — a possibility that JPMorgan warns about on its website. Indeed, investors this year saw how dangerous a ETN that trades at a high premium can be. The Credit Suisse VelocityShares Daily 2X VIX Short-Term ETN (TVIX) stopped issuing new shares in February. The shares quickly doubled in value. But when Credit Suisse Group AG resumed issuing shares in March, the ETN's share price promptly collapsed back to the NAV, wiping out $172 million in a single day. Following that tumble, the Financial Industry Regulatory Authority Inc., the Securities and Exchange Commission and Massachusetts' securities regulator all took note and announced that they would begin looking into how ETNs are sold to consumers. MLP fans do have other options, although they come with their own set of risks. The $3.7 billion ALPS Alerian MLP ETF (AMLP), for example, offers an entry path into the MLP space but does so with extra tax consequences. The ETF is structured as a C corporation to avoid having to pass on pesky K-1s to its shareholders, but that opens it up to corporate-level taxes, which cause the ETF to have trouble tracking its index. In 2011, the ALPS MLP ETF had a tracking error of nearly 7%, the highest of any ETF, according to a Morgan Stanley Smith Barney LLC report.

Latest News

The average retiree is facing $173K in health care costs, Fidelity says
The average retiree is facing $173K in health care costs, Fidelity says

Research reveals a 4% year-on-year increase in expenses that one in five Americans, including one-quarter of Gen Xers, say they have not planned for.

Advisor moves: NY-based Coastline wealth adds three teams with over $430M in assets
Advisor moves: NY-based Coastline wealth adds three teams with over $430M in assets

Raymond James also lured another ex-Edward Jones advisor in South Carolina, while LPL welcomed a mother-and-son team from Edward Jones and Thrivent.

Fintech bytes: Vestwell comes through for underserved savers with multilingual support
Fintech bytes: Vestwell comes through for underserved savers with multilingual support

MyVest and Vestmark have also unveiled strategic partnerships aimed at helping advisors and RIAs bring personalization to more clients.

UBS profit beats estimates as Ermotti sees brighter outlook
UBS profit beats estimates as Ermotti sees brighter outlook

Wealth management unit sees inflows of $23 billion.

Evercore to buy advisory firm Robey Warshaw for $196 million
Evercore to buy advisory firm Robey Warshaw for $196 million

Deal will give US investment bank a foothold in lucrative European market.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.