Barclays’ notice on GAZ ETNs warns investors about price distortion, ‘persistent’ premium

By Emma Trincal

New York, Jan. 26 – Barclays Bank plc issued last week a notice that caught the attention of investors in the iPath Bloomberg Natural Gas Subindex Total Return Exchange-Traded Notes, warning them of the “persistence” of a premium that may not reflect the intraday value of the ETNs.

The ETNs currently trade on the NYSE Arca stock exchange under the ticker symbol “GAZ”.

The bank “temporarily” suspended any new issues of the ETN on August 21, 2009. It still has not resumed issuance of new shares.

The limitation of supply may be causing “an imbalance of supply and demand” in the secondary market for the ETN, causing the ETN to trade at a premium on the exchange, according to the notice published as a press release.

The premium in this case is the difference between the higher trading price of the ETN on the exchange and the intraday indicative value of the ETN. The intraday value reflects the price of the underlying natural gas futures index.

Good corporate citizen

The objective of the press release was to warn investors about the risk of investing in the ETNs, according to the bank.

“The secondary market for the ETNs has been volatile and unpredictable, and investors should not assume that the ETNs will continue to trade at a premium in relation to their intraday indicative value,” said the press release.

Due to the “likely fluctuations” in the premium, Barclays warned that “the ETNs are currently not suitable for most investors.”

“They’ve done it before,” a source said.

“They’ve put out similar warnings. It’s not a requirement by the regulators. It’s just Barclays being a good corporate citizen.”

Barclays issued an investor guidance notice on May 18, 2012 highlighting the same issue in similar terms.

“They are not mandated to do it. That said, ETNs are on the regulators’ radar screen. The SEC has indicated in the past that it’s paying attention about full disclosure when it comes to price discrepancies with ETNs,” the source added.

Redemption versus sale

“They stopped issuing this ETN in 2009. When they say they stopped temporarily, it’s just because they want to give themselves the option of issuing them again. But when you have a temporary suspension, it usually turns out to be permanent.”

The fact that new shares are no longer issued is one of the main factors behind the premium, sources said.

The notice may also offer hints to investors on how to liquidate their position if they want to.

Investors in the ETN can either sell the ETNs on the exchange or redeem them for a minimum of 50,000 ETNs.

“The redemption value is usually close to the indicative value,” the source said.

“Investors who own the ETN would be better off selling it on the exchange than redeeming it. That’s part of the implicit message in the press release. Another warning is that it’s trading at a distorted price. If somebody was counting on the premium, they should be careful. The premium can suddenly disappear. We’ve seen cases like that before.”

Declining price

In last week’s press release, Barclays illustrated the premium issue “GAZ” as follows: from Dec. 1, 2014 to Jan. 12, 2015, the indicative value decreased by about 41%, from $2.34 to $1.39 per ETN, while the closing price of the ETNs on the exchange decreased by only roughly 17%, from $2.4 to $2.00 per ETN.

The closing price of the ETNs on the exchange as of Jan. 12 reflected a 44% premium to current indicative value, according to the press release.

“It’s supply and demand. Even though the underlying index has dropped a lot, the market price for the ETN is still higher,” this source said.

“What it means is that there is still demand for that. Why? I’m not sure.”

The current share price of the ETN intrigued the source who looked at it on Friday when it traded at $1.80. On Monday, the priced dropped to $1.61. The inception price was 50 on Oct. 26, 2006.

“That’s kind of interesting. This thing started at $50 a pop. Now it’s at $1.80. Amazing that it’s considered to be trading at a premium [...] If you believe that low energy prices are not going to last forever, it’s tempting,” the source said.

“You can go and get some of this for almost nothing. I wonder why it’s so low. Maybe it’s not such a good deal. But still, it trades at a premium. Somebody knows something [...]”

On Jan. 22, the ETN price was $2.00. The current price is at its lowest ever. In the summer of 2008, the trading price peaked at $85.

Seen before

A broker said these price anomalies were not unusual.

“It’s not unheard of to see an ETN trading at a discount or premium of its underlying value. It’s really a matter of supply and demand. There’s more demand for the actual ETN than reflected by the actual underlying futures contracts,” this broker said.

“Why the premium? I couldn’t put my finger on it. People may not do their homework. They may not check the index or the underlying natural gas futures prices. Maybe they think it’s a good time to buy natural gas with prices as low as they are now. Whether it’s a good idea or not is another story.

“It could also be because there are a limited number of instruments that allow you trade that particular commodity.

“Sometimes it’s hard to find an ETF or an ETN that is not leveraged.

“What they’re simply saying is that the closing price is not going to accurately reflect the price of the underlying index. These things can happen when you’re dealing with commodities. After all, the index tracks the price of futures contracts. Right now, for instance, oil is at $45 a barrel. This price is based on March delivery. In March, I would expect to buy a barrel of oil for $45 but things can change. You have some element of time value.

“With a stock index it’s very different. Equity markets are more predictable,” the source noted.

Another source said he saw similar patterns outside of the ETN space.

“Those price discrepancies are probably more common with closed-end funds, but I've seen this happen with other ETNs,” a distributor reported.

Commenting on the price drop – the ETN fell by 10.5% on Monday – he said that perhaps the notice caused some to be concerned and to sell.

“When an investor realizes the instrument he is holding is not what he originally thinks he is holding, it’s a natural reaction!” he said.

A spokesperson at Barclays declined to comment.

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