The UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI) started trading April 1, 2010. It is designed to track the performance of the Alerian MLP Infrastructure Index and pay a variable quarterly dividend.

This new ETN may sound similar to the JPMorgan Alerian MLP Index ETN (AMJ), and in fact holdings in the two have significant overlap. However, there are significant differences in the construction of the underlying indexes.

According to the MLPI fact sheet (pdf), the Alerian MLP Infrastructure Index is designed to give investors exposure to the “infrastructure component” of the Master Limited Partnership asset class. Each of its constituents generate at least 50% of their earnings from assets that are not directly exposed to changes in commodity prices.

Alerian employs a multi-tier capped weighting process in the construction of the infrastructure index used by MLPI. The largest of the 25 holdings are capped at 9.5%, followed by additional caps at 7.0% and 4.7%. The index was launched only in March 2008, but the hypothetical backtest shows a 10-year annualized return (as of 12/31/09) of +22.5%. In the same period the broader MLP index gained an annualized +18.8% while the S&P 500 was -0.3%. In contrast, Alerian employs a traditional capitalization weighting for the MLP index used by AMJ. Additional information can be found on the Alerian indexes page.

MLPI claims a current yield of 7.0%, which appears to be before the 0.85% expense ratio. A variable yield will be paid quarterly based on the cash distributions of the underlying holdings. As exchange-traded notes (ETN), the shares are unsecured debt obligations of UBS. Its primary competitor, AMJ, has a current yield of 6.0%, a 0.85% expense ratio, and also uses the ETN structure.

Industry representation within MLPI includes petroleum transportation 44.6%, natural gas pipelines 34.4%, and gathering & processing 20.2%. The largest holdings are:

  • Enterprise Products Partners LP (EPD) 9.5%
  • Kinder Morgan Energy Partners LP (KMP) 9.5%
  • Enbridge Energy Partners LP (EEP) 7.0%
  • Energy Transfer Partners LP (ETP) 7.0%
  • Magellan Midstream Partners LP (MMP) 7.0%
  • Plains All American Pipeline LP (PAA) 7.00%
  • Buckeye Partners LP (BPL) 4.7%
  • NuStar Energy LP (NS) 4.7%
  • ONEOK Partners LP (OKS) 4.7%
  • MarkWest Energy Partners LP (MWE) 4.3%

The JPMorgan Alerian MLP ETN (AMJ) (launch article) (AMJ fact sheet pdf) has attracted significant investor interest. If the new UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI) lives up to its marketing claims, I suspect it will attract significant interest also.

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.