iPath Nat Gas ETN ‘GAZ’ Trading Above NAV

October 21, 2010

 

How To Close GAZ?

The source said it was likely that the rising costs of hedging GAZ, plus marketing and distribution expenses, had probably pushed GAZ close to the edge of solvency.

“The question really is: When will iPath close GAZ?” the source said.

But the rub is that the ETN in particular, which is essentially a bond that promises the holder the returns of a given index minus expenses, isn’t callable.

Barclays addressed the issue of callability of GAZ and 18 of its other commodity ETNs in a regulatory filing in June that amounted to a replication of most of its commodity ETN lineup. We wrote about Barclays’ plans in a story titled “New iPath Commodity ETNs Look Like Cannibals.”

The new callable copycat ETNs—The iPath Dow Jones-UBS Natural Gas Subindex Total Return Callable ETN (NYSEArca: GAZC) in the case of GAZ—will come with an expense ratio of 0.70 percent, a touch cheaper than the 0.75 percent on the existing ETNs, in what amounts to an enticement for investors to make the switch, the source said.

The Barclays official said it’s not yet clear when the new ETNs will go live.

Buyer Beware

GAZ has drifted in and out of normal ranges since creations were halted, and has been steadily above NAV since about mid-September.

ETF industry sources contacted for this story suggested that retail investors unaware of the premium issue surrounding GAZ may be seeking a tactical allocation in natural gas before the weather cools down, but are simply choosing the wrong product to express that intent. Another possibility is that institutional investors are squeezing short-sellers by trying to force them to pay a premium to NAV to get out of their positions.

“The people who bought into the note before they halted the creations are loving this,” said one market maker who requested anonymity. “The losers are the people who are unknowingly buying now that this thing is trading at a premium with creations halted.”

ETNs are debt obligations backed by the issuer—Barclays in the case of GAZ. Apart from the issues like the one GAZ now faces, ETNs typically deliver returns extremely close to that of the underlying index, minus expenses, making them different from ETFs, which typically have some level of tracking error.

In this case, however, the NAV of the ETN is no longer relevant. Without a functional way to arbitrage price differences, investors should be extremely cautious of closed-end funds in ETN clothing like GAZ.

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