Barclays PLC (BARC), the largest provider of exchange-traded notes, said most investors shouldn’t buy its ETN tied to natural gas because the security isn’t properly tracking its underlying index.
The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (GAZ:US), known by its ticker GAZ, has traded at a more than 20 percent premium over the commodity index since Feb. 8, according to data compiled by Bloomberg. From Jan. 31 through May 17, the ETN rose 18 percent while the linked index dropped 19 percent, the bank said in a May 18 statement distributed by Business Wire.
“Due to likely continued fluctuations in this premium, Barclays believes that the ETNs are currently not suitable for most investors and will not track the price of the underlying natural gas futures index in a consistent manner,” the London- based bank said in the statement.
Barclays stopped issuing new GAZ shares in August 2009, which may cause the notes “to trade at a premium or discount in relation to their indicative value,” the bank said in a statement at the time. The note (GAZ:US) currently trades at a 26 percent premium (GAZ:US) over its underlying index, or its indicative value, the highest among more than 1,000 U.S. exchange-traded products, Bloomberg data show. ETNs have come under scrutiny after one from Credit Suisse Group AG (CSGN) lost 50 percent of its value in two days in March.
The U.S. Securities and Exchange Commission put the VelocityShares Daily 2x VIX Short-Term ETN under review in March, according to a person familiar with the matter who asked not to be identified because the inquiry isn’t public. The Zurich-based bank had stopped creating new shares of the ETN on Feb. 21, unhinging the note’s price from the index and leading to a premium that peaked at 89 percent on March 21.
Mark Lane, a spokesman for Barclays, declined to comment about the timing of its announcement about GAZ. The premium for the ETN reached a high of 134 percent on March 19.
“I’m assuming they’re thinking ‘better late than never,”’ said Ron Rowland, founder of Capital Cities Asset Management Inc. in Austin, Texas, and editor of Invest With An Edge, an exchange-traded funds newsletter. “Most people still buying and selling don’t have any idea that it’s trading at a premium.”
ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand typically doesn’t affect the price since the ETNs track the performance of an index.
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