UBS made another addition to its lineup of MLP ETNs this week, debuting a product that will be linked to the same index underlying the popular JPMorgan Alerian MLP Index ETN (AMJ). The UBS ETRACS Alerian MLP Index ETN (AMU), which began trading on Wednesday, represents an opportunity for investors looking to gain exposure to that popular benchmark while avoiding the uncertainty caused by recent developments to AMJ [for updates on all new ETFs, sign up for the ETFdb newsletter].
Under The Hood
The new ETN, like the existing AMJ, will offer exposure to a basket of about 50 publicly-traded energy Master Limited Partnerships. The largest individual components of the benchmark are Enterprise Products Partners (15%), Kinder Morgan (10%), and Plains All American Pipeline (7%).
JPMorgan announced last month that it would cap the maximum number of shares outstanding for AMJ, effectively disabling the creation / redemption mechanism in place to keep the note’s price in line with its indicative value. That led to some speculation that AMJ could begin trading at a premium to its value if demand for the product persisted, adding another risk factor that is entirely beyond the control of investors. So far, there hasn’t been an issue with a premium in AMJ’s share price; the note closed Wednesday within two cents of its indicative value.
AMU will charge 0.80% annually, which is slightly cheaper than AMJ’s 0.85%. That differential means that AMU is essentially guaranteed to outperform AMJ over the long haul–albeit by a relatively small amount [see the AMU fact sheet for complete information on the new ETN].
Case For MLPs
Interest in MLPs has surged in recent years as investors have sought out asset classes that deliver stable and meaningful current returns. In order to realize certain tax advantages, MLPs are required to generate substantially all of their revenue from certain qualified sources. Typically, MLPs pay out a significant portion of their current earnings to shareholders–resulting in relatively attractive dividend yields.
Because most MLPs are engaged in the transport and storage of energy commodities such as natural gas and petroleum, they generate relatively stable earnings. By acting as the “tollroads” through which these natural resources pass, these companies actually have low sensitivity to changes in spot prices, unlike traditional oil and gas stocks [ETFdb Pro members can see the Energy Bull ETFdb Portfolio; sign up for a free 7-day trial for full access].
There are now 11 different ETFs and ETNs in the MLPs ETFdb Category, including two linked to the Alerian MLP Index. UBS is the issuer behind four of those products, as well as a monthly leveraged ETN (MLPL) and a 1x short monthly ETN (MLPS):
- Alerian MLP Index ETN (AMU): Launched July 2012 and linked to the same index as AMJ.
- Alerian MLP Infrastructure ETN (MLPI): Linked to a sub-set of the Alerian MLP Index that focuses on transportation and storage of commodities.
- Alerian Natural Gas MLP Index ETN (MLPG): Linked to an equal-weighted index comprised of 15 largest natural gas infrastructure MLPs.
- Wells Fargo MLP Index ETN (MLPW): Linked to an index comprised of more than 70 MLPs, amking it one of the most broadly-based products out there.
Disclosure: No positions at time of writing.