Alerian Debuts MLP ETF

August 25, 2010

A new MLP ETF hits the market. Is it better—or worse—than competing ETNs?

Alerian, a Texas-based provider of information about master limited partnerships, launched today the first exchange-traded fund to tap into the MLP space.

Up to now, investors seeking access to the MLP asset class could only do so through exchange-traded notes such as the JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), the UBS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) and the Credit Suisse Cushing 30 MLP Index ETN (NYSEArca: MLPN).

Unlike ETNs, the Alerian MLP ETF (NYSEArca: AMLP) will come with no credit risk. The value of an ETN is based solely on the good faith and credit of the issuing bank, whereas ETF owners hold a share in the underlying assets of the fund.

Alerian also says that the ETF will retain the tax benefits of MLP distributions. MLPs are typically a nightmare to hold in a fund setting, because funds are typically taxed as registered investment companies, or RICs, which may only invest 25 percent of their assets in MLPs or they become subject to various tax penalties. AMLP has elected to be taxed as a corporation, which helps it get around this 25 percent tax.

“The Alerian MLP ETF provides a single Form 1099, no K-1s, and allows investors to potentially benefit from return of capital and qualified dividend tax treatment of distributions,” Alerian president and CEO Kenny Feng said in a release.

MLP-based funds appeal to investors seeking income. Their payouts are in the 6 to 8 percent range, an attractive sum at a time when the yield on the 10-year Treasury note is below 2.75 percent amid concerns growth is slowing.

AMLP will track the Alerian MLP Infrastructure Index, a group of 25 MLPs that earn the majority of their income from the transportation and storage of energy commodities. Energy infrastructure MLPs provide "stable and sustainable" cash flows, Feng said in an interview. Because they are not exposed to the underlying commodities prices volatility, they minimize risk and "allow for predictable growth," he added.

The fund will cost 0.85 percent annually, matching the price tag of the MLP ETNs already in the market.

ALPS Advisors will be the distributor of AMLP. Arrow Investment Advisors will serve as the subadviser to the fund.

Van Eck, the New York-based money management firm known for its Market Vectors ETFs, has an MLP ETF currently undergoing registration with the Securities and Exchange Commission.

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