There are many exchange-traded products (ETPs) for investors looking to add MLP exposure to their portfolios. The first step in choosing a product is deciding between an exchange-traded fund (ETF) and an exchange-traded note (ETN).
The landscape of the space was largely defined by two early entrants that utilize different structures: The Alerian MLP ETF (AMLP ) is an ETF, while the J.P. Morgan Alerian MLP Index ETN (AMJ ) was the flagship ETN for the space for years. However, investors should note that AMJ reached maturation in 2024 and is no longer trading; it has since been followed by the JPMorgan Alerian MLP Index ETN (AMJB ), which carries the legacy of the original ticker into a new ETN vintage.
Both ETFs and ETNs trade on an exchange and track an underlying index. Additionally, each issues a 1099, avoiding the hassle of a Schedule K-1. However, their similarities end there, and investors who understand these structural nuances can better determine which product fits their strategy.
The Evolution of the ETN
The first ETF launched in 1993, but ETNs didn’t enter the market until 2006. Barclays Bank originally developed the ETN structure to simplify retail access to hard-to-reach instruments, particularly in the commodities and currency markets.
ETNs are senior, unsecured debt securities issued by a bank. Unlike ETFs, ETNs do not own the underlying assets they track. Instead, the return is linked to the performance of a market index or benchmark. An MLP ETN may take its fee out of the coupons, lowering the yield, or out of its net asset value (NAV). Fees usually come out of NAV, though issuance documents detail the specific collection process.
Key Differences Between the MLP ETF and ETN Structure
The ETN structure minimizes tracking error because the issuer contractually commits to paying the index’s exact return. Furthermore, ETNs do not pay traditional dividends because they do not hold securities. Instead, MLP ETNs pay a variable coupon linked to the cash distributions of the MLPs within the index.
However, a risk unique to ETNs is the creditworthiness of the issuer. Since investors do not own the underlying securities, the return of their investment depends on the bank’s ability to fulfill its debt obligation. Furthermore, ETN coupons are taxed at ordinary income rates, so ETNs are best suited for tax-advantaged accounts. ETFs can work in taxable or tax-advantaged accounts.
MLPs are attractive to investors because they offer tax-deferred distributions and typically provide a high yield, and ETFs like AMLP can offer that exposure in a familiar wrapper. Often, investors use MLP ETFs in income portfolios, as alternative investments, or for real asset exposure in an investment strategy.
Finally, ETNs tend to be less liquid than high-volume ETFs. While ETPs are popular, trading volumes vary significantly, which can impact an investor’s ability to enter or exit a position quickly.
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vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, AMJ, and AMJB, for which it receives an index licensing fee. However, AMLP, AMJ, and AMJB are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, AMJ, and AMJB.
