What I'm referring to is UBS' rollout on Wednesday of the ETRACS Alerian MLP Index ETN (NYSEArca: AMU).
It looks almost exactly like the JPMorgan Alerian MLP ETN (NYSEArca: AMJ)—same index, same structure, similar expense ratio—but with one major difference.
JPMorgan closed AMJ to new creations in mid-June 2012. It sprang to a premium almost immediately after, peaking at 2.7 percent on June 29, before falling to more reasonable levels.
Through yesterday, AMJ holders would have had to decide whether the risk of the premium collapsing was worth exposure to the Alerian MLP Index.
Today, they have an easier and less risky option: Simply buy AMU. Or, if AMJ’s premium gets out of hand again (or at least high enough to offset brokerage fees), short AMJ and buy AMU for practically riskless arbitrage.
One of the advantages of ETNs it that they’re really easy to launch—at least, compared to ETFs. Unlike ETFs, which require exemptive relief and can sometimes take years—if ever—to be approved, ETNs are structured like bonds and can be taken from an idea to a product launch in a matter of weeks.
Which seems to be what happened here.
AMJ is the most popular ETN on the market right now, by far, with over $5 billion in assets—over 30 percent of all U.S-listed ETN assets. The next runner-up, the iPath Dow Jones UBS Commodity Index Total Return ETN (NYSEArca: DJP) has just $2 billion, or less than half of AMJ’s asset count. Thus, it’s no surprise that UBS would want a piece of that pie.
AMU is open for creations and charges 5 bps less than AMJ, making it a viable option.
Still, like all new funds, AMU has to start at the bottom. AMJ may be closed for creations, but it is still an extremely liquid ETN: On average, $67.2 million change hands daily at 0.07 percent bid/ask spreads.
In contrast, AMU is currently trading at a $0.03 bid/ask spread, which equates to 0.12 percent. About 350,000 shares, or $8.75 million, have changed hands thus far, according to Fidelity, so it’s off to a good start. But it remains to be seen whether that volume will hold up over time.
Very large investors may be better off sticking to AMJ for now, since slippage can increase transaction costs just as much as premiums can.
But keep an eye on both funds: If AMU remains popular it should be the better choice for all involved. At the very least, it should keep AMJ’s premium down.
If CalPERS is taking hedgies out, ETFs may be coming back in.
As valuations grow uncomfortably high, ‘quality’ ETFs makes more sense—if you can figure out just what quality means.
‘Smart beta’ almost surely means loss of more market share for active managers.
Be careful of your assumptions (and headlines!) about volatility ETFs.