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When an ETF starts to trade at a significant premium to its net asset value (NAV), it usually means the creation/redemption process, the mechanism by which ETF shares are made or destroyed, has fundamentally broken.
So has something broken within the ETFMG Alternative Harvest Fund (MJ)?
Earlier this week, MJ’s issuer, ETF Managers Group (ETFMG), replaced the fund’s former custodian and transfer agent—U.S. Bank and its parent company, U.S. Bancorp—with Wedbush Securities and Computershare, respectively (read: “Marijuana ETF Shifts Custody”).
Over the past two days, since the change was announced, MJ has seen a sudden and substantial spike in its trading premiums. As of 2 p.m. ET on Sept. 20, the premium had risen to 3.2%:
Source: Bloomberg.com; data as of Sept. 20, 2018
Where did this significant trading premium originate—and is it connected, somehow, to MJ’s new service providers?
Good Month For MJ
MJ isn’t known for exhibiting historically large trading premiums or discounts: Over the past 12 months, the fund’s median premium/discount was just 0.03%. Any trading premium or discount that arose was arbitraged out quickly by the fund’s authorized participants (APs).
This has remained true even as the performance of the fund’s underlying marijuana stocks has gone through the roof, and performance-chasing money has poured into MJ. Since Aug. 20, MJ has taken in $104 million in new net assets.
Yet through it all, MJ retained relatively small premiums and discounts—until two days ago, when it came to light that MJ had replaced its custodian and transfer agent.
What Is A Transfer Agent?
We’ve reported in the past on MJ’s issues with its custodian (read: “Promise & Peril Of Marijuana ETFs”). However, this recent spike in trading premiums instead may be related to the ETF’s new transfer agent, Computershare.
A transfer agent plays an often-overlooked but essential role in the creation/redemption process to generate or destroy ETF shares (read: “So You Want To Launch An ETF”).
To create new ETF shares, APs present an ETF issuer with a basket of the underlying index’s stocks. The ETF’s distributor takes those shares and passes the order on to the transfer agent, who creates new ETF shares in big chunks known as creation units (read: “What Is The Creation/Redemption Mechanism?”).
To destroy ETF shares, the reverse occurs: APs present some number of creation units’ worth of ETF shares to the issuer, and the transfer agent redeems those shares into the constituent stocks.
The transfer agent also maintains records of all this creation and redemption activity, for the benefit of the issuer, investors and all parties in between.
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