GAZ – The Ultimate Greater Fool Trade

If you own GAZ you are probably going to lose a lot of money relative to your alternatives.  Let me explain.

GAZ is an ETN – an exchange traded note issue by Barclays, whose value is linked to the return on the Dow Jones-UBS Natural Gas Subindex.   ETNs, like ETFs, allow creations and redemptions by authorized participants (read: the big banks), which normally keeps their trading price closely in line with the actual net asset value of the fund.   If the market price gets out of line with the net asset value, APs can create shares (when the price is too high) or redeem them (when the price is too low) to correct the mispricing.

With GAZ, however, creations of new units have been suspended, thus the fund trades like a closed end fund (redemptions are still allowed – they just make no sense, considering the huge premium to NAV.  You’d never redeem your shares for their “value” which is much less – you’d just sell them instead).   Now, there could be scenarios where it makes sense for investors to pay a premium to NAV in order to get exposure to a given asset class.  For example, it’s not super easy for the average schmuck to go out and buy natural gas futures, so there is the possibility that one might want to pay a premium for a fund like GAZ.   However, there is a competing product – $UNG – which offers very much the same exposure (although not identical exposure – there are some differences in the actual exposure held by each fund), and thus it makes somewhere between little and no sense for investors to pay up for $GAZ when they could buy $UNG instead.   Of course, sometimes investors do things that don’t make sense:

Good Luck With That

That’s a 1 month chart of GAZ vs UNG.  GAZ has outperformed by more than 80%.   Currently, GAZ is trading (around $5.85 as I type this!) at more than an 80% premium to its Net Asset Value.

Now for the bad news: as a trader, there’s nothing I can do about this.  I can’t borrow GAZ shares to short them (none available).   In that sense, it’s kinda like the Sunpower trade I wrote about last year.    There is a very select group of market participants who can act on this:  GAZ longs – they can sell their GAZ and swap into UNG.   Doing this swap is the equivalent of selling a $100 bill for $180 and then buying 1.8 $100 bills with the proceeds.

Is it possible that tomorrow someone might be willing to pay a 100% premium to NAV for GAZ?  Yes – absolutely.  Anything is possible, and we’re talking about a microcap (roughly $70 MM in total)  fund where there is no way for the market to correct the mispricing.  But if you’re holding GAZ, you’re betting on a greater fool being out there willing to pay you a premium price; when in reality there isn’t a compelling reason to do so.


disclosure: no positions in $UNG/$GAZ



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