They did it again. Alerian MLP ETF (AMLP), the first ETF structured as a C-corporation, raised its expense ratio for the second time this year. It issued another prospectus supplement dated May 9, 2012 (pdf), increasing expenses from 1.40% to 4.86%. Most ETF data sources still incorrectly list its expense ratio as 0.85%. I have issued numerous warnings about the flawed and costly structure of allowing C-corporations to masquerade as ETFs, and it should now be more obvious to casual observers.

The huge increase was the result of “Other Expenses” jumping to 4.01%. Don’t overlook the management fee of 0.85%, bringing the total to 4.86%. Here is AMLP’s small print associated with the 4.01% of “other expenses”:

The Fund is classified for federal income tax purposes as a taxable regular corporation or so-called Subchapter ‘‘C’’ corporation. As a ‘‘C’’ corporation, the Fund accrues deferred tax liability for its future tax liability associated with the capital appreciation of its investments and the distributions received by the Fund on equity securities of master limited partnerships considered to be a return of capital and for any net operating gains. The Fund’s accrued deferred tax liability, if any, is reflected each day in the Fund’s net asset value per share. The deferred income tax expense/(benefit) represents an estimate of the Fund’s potential tax expense/(benefit) if it were to recognize the unrealized gains/(losses) in the portfolio. An estimate of deferred income tax expense/(benefit) is dependent upon the Fund’s net investment income/(loss) and realized and unrealized gains/(losses) on investments and such expenses may vary greatly from year to year and from day to day depending on the nature of the Fund’ s investments, the performance of those investments and general market conditions. Therefore, any estimate of deferred income tax expense/(benefit) cannot be reliably predicted from year to year. For the period January 1, 2011 to November 30, 2011, the Fund had net operating gains of $119,028,888 and accrued $41,045,270 in net deferred tax expense primarily related to unrealized appreciation on investments.

Many analysts expect AMLP to be a major beneficiary of new inflows resulting from the recent share capping of its prime competitor – the JPMorgan Alerian MLP ETN (AMJ). See Broken Product Alert: AMJ Converting To Closed-End Note for additional information. Investors should fully understand the flaws of placing tax-advantaged securities like MLPs into a C-corporation structure like AMLP before taking the plunge.

At 4.86%, you might think that AMLP is the most expensive ETP on the planet. However, that honor still belongs to six ETRACS VIX ETNs with 5.35% annual expense ratios.

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Disclosure covering writer, editor, and publisher: Long AMJ. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.