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ETF Specialist

A Premium Reappears for JPMorgan Alerian MLP Index ETN

While investors have flocked to an MLP exchange-traded fund, we recommend sticking with exchange-traded notes for this asset class.

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Starting in late March,  JPMorgan Alerian MLP Index ETN (AMJ) began trading at a small premium to its net asset value. This week, the premium reached as high as 5% on below-average trading volume. The situation should not come as a surprise--
 J.P. Morgan Chase (JPM) capped the creation of new AMJ shares in June 2012, and this decision effectively turned the exchange-traded note into a closed-end product. If demand for AMJ exceeds the shares available, the ETN will trade at a premium to NAV.

As a refresher, when the demand for shares of an exchange-traded fund exceeds the supply on offer, an authorized participant (AP) ordinarily steps in to create new shares. The AP buys the ETF's constituents and delivers them to the ETF's issuer in exchange for shares of the ETF. The opposite process, called a redemption, is when the AP delivers ETF shares in exchange for the underlying stocks. This arbitrage process prevents the price of an ETF from significantly deviating from its NAV. Because ETNs are debt obligations and do not actually own any underlying assets, the creation and redemption process occurs with cash. However, AMJ currently has no creation capability.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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