iPath Nat Gas ETN ‘GAZ’ Trading Above NAV

October 21, 2010

iPath’s natural gas ETN grapples with a price above NAV related to halted creations.


The iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (NYSEArca: GAZ) has been trading at a premium of as much as 10 percent above net asset value this week, the result of a recent spike in demand coming after the ETN’s issuer halted creations of new notes in August 2009.

Halting creations of new GAZ notes has essentially transformed the fund into a closed-end product, according to industry sources who spoke to IndexUniverse.com on condition of anonymity. GAZ ended Wednesday’s session at $7.79 a share, 6 percent above NAV of $7.34, according to data compiled by IndexUniverse.com. Spikes in demand are normally met by issuers creating new notes, thus keeping the price in line with NAV.

The spike in demand recently could be related to retail investors buying without being aware that GAZ creations are halted, or by more sophisticated traders and institutional investors who are trying to profit from pushing GAZ’s price higher, ETF traders and market makers told IndexUniverse.com.

Barclays halted creations on GAZ in August 2009, citing “current market dynamics and ongoing regulatory review,” as we reported last year. One industry source said creations stopped not because of an ongoing regulatory review of position limits for ETNs and ETFs that use futures, but because hedging costs to run the portfolio had simply become too expensive. A Barclays official declined to comment.

The question of hedging costs goes to the heart of one of the important distinctions between an ETN and an ETF. An ETF in the same position as GAZ, such as the United States Natural Gas Fund (NYSEArca: UNG), would just pass on higher hedging costs to shareholders. Those costs would show up in investor returns as higher tracking error. In the case of an ETN, which commits by contract to provide a precise pattern of returns at the note expiration, the note holder would be spared such tracking error, and responsibility for hedging that promise-to-pay is entirely the responsibility of the issuing bank (Barclays, in the case of GAZ), whatever the cost.

“With ETNs, you have no way of passing along those hedging costs,” one exchange-traded product industry source said, adding that hedging futures positions on futures-based energy commodity funds did indeed rise last year.

Clearly, the size of the fund isn’t the issue: UNG had almost $2.49 billion in assets as of Tuesday’s close, compared with $117.6 million for GAZ.

In its announcement last year, Barclays said the “temporary suspension” could impact other iPath ETNs. Indeed, in October 2009, Barclays halted creations on its iPath Dow Jones-UBS Platinum Subindex Total Return ETN (NYSEArca: PGM). PGM, which has $78.2 million in assets, is now trading at a slight discount to NAV.


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