The first ETP to track a basket of master limited partnerships (MLPs) was launched in mid-2009, and since that time a few competitors have joined the foray. The first to market was the JP Morgan Alerian MLP ETN (NYSEArca: AMJ), which offers a yield of 5.3 percent and carries a 0.85 percent expense ratio. Others have entered the MLP market and offer similar yields for investors. Several of my clients began investing in MLPs before an ETP was available; we gained our exposure to the sector through the Fiduciary/Claymore MLP Opportunity Fund (NYSEArca: FMO). At this time, we are considering moving our assets out of FMO and into AMJ due to lower annual fees and the structure of an ETN.
One of the benefits of MLPs has to do with their ties to energy and infrastructure. The majority of the stocks that make up the ETPs are in the energy sector and more specifically the pipeline business. Therefore the MLPs can benefit from higher energy prices as well as a higher stock market, all the while delivering above-average yield. The risk is that energy prices fall along with stocks; while MLPs won’t suffer at the same level as traditional energy stocks from falling energy prices, they could lose out in a broader market decline.
If you look hard enough and are willing to think outside the box and take on a little risk, there are yields available to investors outside the realm of fixed income. Indeed, with Treasury yields compressed, these options may be attractive. That said, the ETFs listed in this article have their connection with equities, and therefore investors must realize that another bear market would be detrimental to all.
Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.