UBS, Aiming At AMJ, Launches Twin MLP ETN

July 18, 2012

UBS takes advantage of the premium on the MLP ETN, AMJ, by launching a clone called AMU.

UBS, the Swiss bank known for its private client banking, on Wednesday rolled out an ETN focused on the master limited partnership space that is essentially the same security as the troubled JP Morgan Alerian MLP ETN (NYSEArca: AMJ). Putting emphasis on its move, UBS’ new ETN is 5 basis points cheaper than AMJ.

The new Etracs Alerian MLP Index ETN (NYSEArca: AMU) is based on the same index as J.P. Morgan’s AMJ, but the new UBS security has an annual expense ratio of 0.80 percent, arguably making it more alluring to investors who want to get exposure to MLPs via an ETN.

For those who missed it, J.P. Morgan said about a month ago it was closing creations to AMJ, a yield-rich security that had grown so rapidly that industry sources said hedging its exposure had become too unwieldy. It didn’t take long for investors to push the AMJ to trade at a premium to its net asset value in the range of 1 to 3 percent since creation stopped, and that’s when UBS decided to pounce.

In the end, the presence of an identical security on the market may end up putting a cap on the AMJ premium, as demand for AMJ can now be met using AMU, and at a lower price.

AMJ, which focuses largely on energy-related master limited partnerships such as pipelines, has grown in size quickly because it’s paying a hefty dividend at a time when official short-term interest rates are near zero. AMJ ended Tuesday’s session with $5.10 billion in assets, or 40 percent more than at the end of 2011, and up about 7 percent higher from a month ago, according to data compiled by IndexUniverse.

UBS’ move was all the more conspicuous in that the ticker symbol, AMU, looks a lot like AMJ. Moreover, considering UBS already has five MLP-focused ETNs on the market, it hardly seems a stretch to say that the decision to bring to market an ETN that looks exactly like AMJ was a purely opportunistic move, and the pricing ploy all but proves that.

Officials at UBS declined to comment.

Changing The Playing Field

Many industry sources had been saying that the fact the $5 billion AMJ—the single biggest U.S.-listed ETN—had closed its doors to new creations would be a boon to competing products on the market, and June flows data suggest there might be something to the view.

Assets in UBS’s own ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) have jumped since the AMJ story came out. The ETN gathered $3.2 million in June, bringing its assets at the end of the first half to $241.2 million. MLPI's assets have jumped almost 18 percent so far this month to $284 million as of July 17, according to data compiled by IndexUniverse.

Even ALPS' Alerian MLP ETF (NYSEArca: AMLP) pulled in $171.5 million in June, with the competing ETF ending the first half with $3.39 billion.

MLP ETFs don’t run the same creation limitations as ETNs, but do have tax consequences that MLP ETNs don’t have, namely double taxation.

The underlying holdings of an ETN are taxed like a stock—either at a short-term capital gains or long-term capital gains rate, depending on the holding period, and distributions are taxed at the holder’s ordinary tax rate.

Most of the MLP ETNs on the market come with an annual expense ratio of 0.85 basis point, so UBS new ETN AMU joins a group of slightly less expensive securities.

The Yorkville High Income MLP ETF (NYSEArca: YMLP) costs 0.82 percent a year, while the Global X MLP ETF (NYSEArca: MLPA) comes in with a lowest-in-class price tag of 45 basis points.


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