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MLPs: What You Didn’t Know-ETP Insight From An Expert

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Chris Hempstead, WallachBeth Capital

It took only 18 months for assets in MLP exchange traded products to grow from almost nothing to nearly $7.5bb.

What’s more amazing is that while the number of ETPs available in the market has grown significantly, nearly all of the inflow of assets into MLP ETPs has been captured by only 2 funds:

AMJ–JPMorgan Alerian MLP Index ETN $4.2bb assets under mgmt.

AMLP–Alerian MLP ETF $3.25bb assets under mgmt.

This success story has recently attracted more funds into the space and we expect that trend to continue.

The most recent launches in the MLP space are YMLP (Yorkville High Income MLP ETF) and the MLPA (Global X MLP ETF).

Here is the twist that precipitated this note: JPMorgan has announced (June 14) that they will cap the issuance in AMJ at 129mm notes.

This will bode well for the ETFs tracking the MLP space. A brief explanation below may help shed light on this.

When an ETP no longer allows for creations, the fund starts to trade like a closed end fund. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.

It should be noted that this is only a cap of notes issued. Should the fund reach the cap (we expect it will very soon) and redemptions follow, the fund would allow creates until it reached the cap again.

So what happens now?

We simply wait and see. When AMJ reaches the maximum threshold, we will closely monitor the availability of AMJ notes available in stock loan as well as any premium in the funds pricing on the secondary market.This could bode well in the short term for existing holders of AMJ as the fund will likely trade at a premium once the creation facility is shut down. Early investors would not have expected this so it’s a win for them.

That being said, once this happens I expect investors looking at MLP ETPs will be drawn away from the AMJ ETN and towards the ETFs mentioned above. Why? With the creation facility wide open in ETF funds like AMLP, YMLP and MLPA we expect them to trade and track at or close to their respective net asset values. Continue reading →

ETF News

JPMorgan Caps Issuance on MLP ETN

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The ETF Professor, Benzinga Staff Writer

JPMorgan Chase (NYSE: JPM) announced on Thursday that will cap issuance for the popular Alerian MLP Index ETN (NYSE: AMJ) at 129 million notes. The move is significant because with almost $4.2 billion in assets under management, the Alerian MLP Index ETN is the largest exchange-traded product offering exposure to MLPs.

The universe of MLP exchange-traded products has grown rapidly, but the Alerian MLP Index ETN and the ALPS Alerian MLP ETF (NYSE: AMLP) combine for the bulk of the roughly $7.5 billion in MLP exchange-traded products assets under management, according to data furnished by WallachBeth Capital.

New York-based WallachBeth, one of the largest ETF execution firms in the U.S., said JPMorgan’s decision to cap issuance on AMJ could open the door for new MLP ETFs to gain assets. In a note published by the firm today, AMLP, the newly minted Yorkville High Income MLP ETF (NYSE: YMLP) and the Global X MLP ETF (NYSE: MLPA), another new fund, were cited as examples of fund that could potentially benefit from the AMJ issuance cap.

“When an ETP no longer allows for creations, the fund starts to trade like a closed end fund,” WallachBeth said in the note. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.”

Continue reading →