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Monday, June 25, 2012

Can ETNs Be Too Popular?

News summary by MFWire's editors

Here comes 2012's second in self-imposed exchange-traded note caps. J.P. Morgan Chase [profile] is capping new-share issuance for the $4.7 billion JPMorgan Alerian MLP Index ETN (AMJ), the most widely owned tracker of master limited partnerships -- yield-rich oil-and-gas pipeline and processing firms whose payouts average around 6 percent -- reports Brendan Conway for Barron's.

While it may seem ironic to cap such perfect matches for the tax efficiency and index tracking of ETNs, a big surge of investor interest can create problems -- like more difficulty hedging or needing to devote more time -- for issuing banks, which are under pressure to deliver investors' returns. JPMorgan hasn't commented publicly as to why it's capping AMJ, but more than a third of the fund's assets arrived in the past year.

"It's hard for ETN providers to keep up with strong growth and still run the portfolio as they'd like to," explained S&P Capital IQ fund analyst Todd Rosenbluth. "JPMorgan is taking on risk in a way that Alerian or Global X or other MLP providers are not."

In the short run, AMJ's share cap might benefit existing investors, since it drives the price of the ETN to a premium. The bigger concern, however, is whether more ETNs will cap issuance and what this says about the commitment of providers to investors, Conway reports.

Investors can find a number of alternatives to AMJ, such as the $3.3 billion ALPS Alerian MLP [profile] -- which is down 3 percent this year through Thursday -- or UBS' [profile] ETRACS Alerian MLP Infrastructure Index -- which is down 4.8 percent. However, these alternatives only track around half as many MLPs as AMJ. 

Edited by: Irene Park

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