Bloomberg News

UBS Lists MLP Note After JPMorgan Suspends Shares in Largest ETN

July 18, 2012

UBS AG (UBSN) listed an exchange-traded note tied to the same index of master-limited partnerships as a JPMorgan Chase & Co. (JPM:US) security that capped new share issuance last month.

UBS, Switzerland’s largest bank, started trading the ETRACS Alerian MLP Index (AMZ) ETN today under ticker AMU. The note tracks the Alerian MLP Index, a group of 50 publicly traded companies that don’t pay federal income taxes and rely on assets, such as pipelines, to generate cash flow for taxable payouts to holders. The note is the second tied to the gauge.

Demand for notes tied to MLPs has surged as new technologies such as hydraulic fracturing increase oil and gas production, Ethan Bellamy, a Robert W. Baird & Co. equity analyst, said in May. Investors also have flocked to them because they can require fewer tax filings than investing directly in partnerships, for which separate tax returns may be needed in each state a partnership does business, Bellamy said.

“MLPs continue to be a highly-favored asset for investors seeking attractive yields and relatively low correlation to other asset classes,” Christopher Yeagley, UBS’s head of U.S. equity structured products, said in a statement.

JPMorgan limited the creation of shares in its Alerian MLP Index ETN (AMU:US), the largest U.S. ETN by market value, to 129 million on June 14. It reached that threshold six days later, raising concern that the note could become unhinged from its underlying index, which happened in March with an ETN issued by Credit Suisse AG.

Pipelines, Ships

The JPMorgan note, which makes up more than 40 percent of the U.S. ETN market, has added 35 million shares this year, an increase of 37 percent, according to data compiled by Bloomberg.

JPMorgan’s ETN matches the returns from the Alerian index, which has returned 13.6 percent the past year, before a 0.85 percent management fee. The UBS security charges 0.8 percent, according to prospectuses filed with the U.S. Securities and Exchange Commission. Master limited partnerships, which trade publicly, typically invest in assets ranging from pipelines to ships transporting commodities.

Zurich-based Credit Suisse on Feb. 21 stopped issuing shares of an ETN tied to the Chicago Board Options Exchange Volatility Index, known as the VIX. A month later, the TVIX note began diverging from its underlying index to trade at a premium of as much as 89 percent. Over two days in March, it lost more than 50 percent of its value.

The SEC is probing price gyrations in the security, a person familiar with the matter said in March, asking not to be identified because the inquiry isn’t public.

ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of the notes 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.

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net;


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $60.2 USD
    • -0.04
    • -0.07%
  • AMU
    (ETRACS Alerian MLP Index ETN)
    • $33.4 USD
    • -0.03
    • -0.09%
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