With Treasuries and corporate bonds offering record low yields and perhaps relatively high risk, many investors have begun looking elsewhere for opportunities to provide reliable income to their portfolios. Dividend-paying ETFs are one interesting option, but some investors are hesitant to swing big portions of their fixed income allocation into equities.
For investors seeking both current income and some potential for price appreciation, one relatively unknown asset class has seen its popularity surge: energy income products. These funds, which include firms that generally own energy infrastructure assets such as pipelines or oil and gas producing sites, tend to be relatively uncorrelated with the commodities they transport and equity markets in general. With a risk and return profile that falls somewhere between stocks and bonds, energy income funds are finding a home in more and more portfolios.
Currently there are two options available to investors: Claymore/SWM Canadian Energy Income Index ETF (ENY) and JPMorgan Alerian MLP Index ETN (AMJ). While these exchange-traded products are similar in many ways, they are far from identical, and there are a few key differences that investors should consider [see Free Report: Everything You Need To Know About Commodity ETFs].
ENY tracks the Sustainable Canadian Energy Income Index, which is a benchmark comprised of approximately 30 stocks listed on various North American exchanges. Selections are made from a universe of companies including over 25 TSX-listed Canadian royalty trusts and 20 oil sands resource producers that are classified as oil and gas producers. The goal is to “combine the most profitable and liquid Canadian royalty trusts with the most highly focused and fastest growing oil sands producers using a tactical asset allocation model based on the trend in crude oil prices.”
When crude oil is thought to be in a bullish phase (based on closing price relative to four quarter moving average), the fund allocates 70% to oil sands producers and 30% to income trusts, and vice versa when crude is in a bear phase (read more about ENY in Beyond XLE: Five Energy ETFs Flying Under The Radar).
AMJ tracks the Alerian MLP Index, which is a market-cap weighted, float-adjusted index designed to track the performance of the energy Master Limited Partnerships (MLP) sector. The majority of MLPs currently operate in the energy infrastructure industry, owning assets such as pipelines that transport crude oil, natural gas and other refined petroleum products. It is also important to note that AMJ is an exchange traded note (ETN), meaning that it is a senior unsecured debt obligation of JP Morgan Chase.
ENY consists of 24 securities that are all based in Canada. Its largest holdings include Canadian Oil Sands Trust (7.14%) and Baytex Energy Trust (7.04%). AMJ consists of the 50 most liquid securities that are Master Limited Partnerships, all of which are based in the U.S. Despite containing more securities, AMJ is more concentrated in its top holdings than its Canadian counterpart, with 14.1% of the fund going towards Enterprise Products Partners LP and 11.7% going to towards Kinder Morgan Energy Partners LP. In total, about 62% of AMJ is in the top ten holdings while ENY allocates a slightly lower 57% to its top ten. ENY also has a much broader focus, investing in both oil sands firms and pipeline owners while AMJ employs a more narrow approach: it only invests in energy infrastructure assets [see 1,400+ ETFdb Realtime Ratings]
Performance & Fees
ENY has performed very well over the past year, gaining almost 80%. AMJ is up about 50% since its launch in April, and has seen assets surge to nearly $1 billion since inception. For current income, ENY pays out an impressive yield of 4.12%. However, this is lower than the yield being paid by AMJ. According to the factsheet (PDF), AMJ pays out a robust current yield of 6.4%.
From an expense perspective, ENY charges 0.65% compared to 0.85% for AMJ.
While both funds pay out good yields and have done very well for investors over the past year, there are a few key differences. ENY is probably more appropriate for investors seeking to keep costs down and are bullish on Canadian oil sands production in the near future. It would also make an interesting choice for investors seeking a more even allocation of funds in the sector, since it is less concentrated than its American counterpart.
AMJ offers a way to access the U.S. midstream energy sector without the administrative hassle of K-1 forms. Moreover, because MLPs typically generate fee-based revenues, their performance tends to be less directly tied to changes in commodity prices.
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Disclosure: no positions at time of writing