UBS Rolls Out MLP ETN, Creating Competition

April 01, 2010

Investors' quest for yield at a time of low rates just got easier, as UBS serves up an ETN of master limited partnerships that will compete with another similar product from J.P. Morgan.

UBS, the Swiss bank famous for private-client wealth management, launched an exchange-traded note today focused on
U.S. master limited partnerships that will compete with a product from J.P. Morgan also offering investors an attractive yield in an environment of ultra-low interest rates.

The UBS E-TRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) joins the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), and isolates partnerships that are involved in energy infrastructure such as pipelines, said Christopher Yeagley, managing director and head of U.S. structured equity products.

MLPs, which generally pay reliable quarterly dividends to investors, are attractive at a time when official interest rates are close to zero after the Federal Reserve cut official interest rates to revive an economy that’s in its deepest downturn since the 1930s. MLPI has a current yield of 7 percent, while AMJ was yielding about 6 percent at the end of February, according to a J.P. Morgan fact sheet on its ETN.

“It’s a good way to get yield,” said Yeagley. “Investors like the toll-road nature of energy-infrastructure MLPs, which are increasingly becoming a greater part of investors’ portfolios, especially as the economy starts to recover and investors expect greater demand for energy going forward.”

ETNs are debt issues backed by the good faith and credit of the issuer—in the case of MLPI, UBS. That means investors incur credit risk. But ETNs also give investors the exact return of a given benchmark after fees, eliminating the tracking error often associated with ETFs.

Two Products, Same Price

The Alerian MLP Infrastructure Index that MLPI uses has 25 companies in it, while the Alerian MLP Index used by J.P. Morgan’s competing ETN, AMJ, has 50 companies. AMJ’s benchmark is a composite that includes partnerships involved in maritime shipping, as well as transportation of coal and propane, while MLPI’s index is more squarely focused on pipeline MLPs.

According to a study by UBS backtesting investment performance since 1995, MLPI has average annualized returns of almost 21 percent, compared with about 16 percent for AMJ. The study was part of a document UBS filed with the Securities and Exchange Commission.

Both products charge a 0.85 percent annual management fee. Yeagley said the expense ratio reflects costs associated with hedging MLPs, which are often not traded as much as stocks.

But he said MLP ETNs can simplify tax issues investors have when they buy individual MLPs.

“Owning an MLP from a tax perspective can be administratively cumbersome,” Yeagley said. “MLP exposure via ETNs is less burdensome because you just get a 1099 at the end of the year. ETNs are a convenient way to get access to MLPs.”

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