How To Get The Right MLP Structure

December 01, 2014


Liquidity Matters
Finally, liquidity matters when selecting an MLP fund or note. There's a noteworthy anomaly in the space: The largest ETN, the JPMorgan Alerian MLP ETN (AMJ), has suspended new creations, probably to cap the issuer's risk in hedging the note's exposure. Without a functioning create/redeem process, an ETP can drift significantly away from fair value: AMJ has traded at almost 5% premiums at times over the past 12 months, adding an element of risk for those trading in and out.

More commonplace liquidity concerns crop up too in the space despite its popularity. For example, a fund launched in April 2014, the Barclays OFI SteelPath MLP ETN (OSMS), has struggled mightily to attract investors. It often goes for days without trading a single share.

Liquidity is a good first screen when choosing among the 22 MLP ETPs on the market. For those funds that make the cut, investors should consider which legal structure meets their needs with respect to pure-play exposure and taxes, and then move on to the strategies offered by each fund.


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