UBS introduced the ETRACS Alerian MLP Index ETN (AMU) July 18. AMU provides another way to track the same index as the now “closed-end” JPMorgan Chase Alerian MLP ETN (AMJ). AMU is an exchange-traded note linked to the performance of the Alerian MLP Index. It pays a variable quarterly coupon linked to the cash distributions, if any, on the Master Limited Partnerships (“MLPs”) in the Alerian MLP Index, less investor fees.
The underlying Alerian MLP Index is a composite of 50 publicly-traded energy MLPs, calculated using a float-adjusted, capitalization-weighted methodology. The index was created on June 1, 2006 and currently has a 5.9% yield.
The UBS annual tracking fee of 0.80% gives AMU a 5.1% estimated yield. The largest index constituents include Enterprise Products Partners LP (EPD) 15.5%, Kinder Morgan Energy Partners LP (KMP) 9.6%, Plains All American Pipeline LP (PAA) 6.7%, Energy Transfer Equity LP (ETE) 4.8%, and Magellan Midstream Partners LP (MMP) 4.4%.
Additional information: AMU overview, factsheet (pdf), and prospectus supplement (pdf).
Opinion/Analysis: AMU is the third ETP based on the same Alerian MLP Index. The first, BearLinx Alerian MLP ETN (former ticker BSR), was abruptly delisted in 2009 after JPMorgan assumed responsibility for the defunct Bear Stearns. JPMorgan briefly had two identical products on the market: BSR and JPMorgan Alerian MLP ETN (AMJ). The recent decision by JPMorgan to halt the AMJ note creation process essentially renders it a closed-end product. This makes AMJ vulnerable to huge price premiums, although the premium has been modest so far. UBS has the most extensive MLP exchange-traded product line; AMU brings the count to six.
ETFs are generally favored over ETNs due to credit risk, but I believe the MLP asset class is an exception to this rule-of-thumb. Current regulations force MLP ETFs into a C-corporation structure with a 35% corporate tax rate at the entity level. The additional ETN credit risk is easily the lesser of two evils. The C-corporation structure is a huge drag on ETF performance in this segment.