A popular master limited partnership exchange traded note has started to trade at a premium to its net asset value once again, highlighting additional risks associated with the ETN structure.

The JPMorgan Alerian MLP Index ETN (AMJ) was trading at a premium of around 3% late last week, with some traders attributing the run up to large option trades. The ETN had set an all-time high closing premium of 4.3%, according to the MoneyBeat blog at WSJ.com.

The issuing bank of the ETN halted new share creations due to the difficulty in hedging out MLP exposure, essentially turning the ETN into a closed-end fund. Consequently, premiums and discounts to net asset values can occur.

J.P Morgan has restricted the number of shares issued at 129 million on June 14, 2012 amid rising demand for AMJ as an alternative for yields.

"It matters because you have a lack

By Abby Woodham

Starting in late March, JPMorgan Alerian MLP Index ETN (AMJ) began trading at a small premium to its net asset value. This week, the premium reached as high as 5% on below-average trading volume. The situation should not come as a surprise--J.P. Morgan Chase (JPM) capped the creation of new AMJ shares in June 2012, and this decision effectively turned the exchange-traded note into a closed-end product. If demand for AMJ exceeds the shares available, the ETN will trade at a premium to NAV.

As a refresher, when the demand for shares of an exchange-traded fund exceeds the supply on offer, an authorized participant (AP) ordinarily steps in to create new shares. The AP buys the ETF's constituents and delivers them to the ETF's issuer in exchange for shares of the ETF. The opposite process, called a redemption, is when the AP delivers ETF shares

Master Limited Partnerships (MLPs) are back in vogue as an asset class that can offer both superior yields and portfolio diversification. You can purchase MLPs as individual units (purchased like a stock from your broker) or via Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), or Closed End Funds (CEFs). There are many articles on Seeking Alpha discussing the merits of individual MLPs so I will not cover them here. Instead, in this article I will focus on the risk versus reward of MLP ETF/ETNs (I will extend the analysis to CEFs in a subsequent article).

But before I begin the analysis, I believe a quick tutorial is in order since there are some unique aspects of MLPs. This will be a high level overview as I am not qualified to cover all the tax related nuances of MLP investing.

The rules for modern day MLPs stem from the Revenue