ALPS looks to rectify AMLP's tracking error by going back to the drawing board.
ALPS ETF Trust, the Denver-based ETF firm known as one of the first firms to actively market ETFs, is planning to launch a new and improved version of its Alerian MLP Infrastructure ETF (NYSEArca: AMLP) to address the issue of tracking error.
The Alerian Plus MLP Infrastructure ETF will track the same index benchmarking AMLP, but unlike its predecessor, it will seek to minimize tracking error that stems from the fund’s tax structure. ALPS will address the fact that the ETF’s index isn’t adjusted for taxes by “borrowing money from a bank and investing the proceeds in component securities of the index,” the filing said.
Returns on these borrowed funds should help reduce the difference in performance between the fund and the index, mitigating the tracking error caused by the daily accrual of a tax liability, the company said.
ALPS’ new infrastructure fund won’t qualify as a registered investment company (RIC) under the Internal Revenue Code of 1986, and will be taxed as a regular corporation for federal income tax purposes, as is the case for AMLP.
AMLP was the first-ever MLP-based ETF made available to U.S. investors, last summer. Up until that point, MLP strategies were confined to the ETN format. The JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), the space’s biggest player, had $2.8 billion in assets as of May 2, according to data compiled by IndexUniverse.
MLP-based funds are increasingly popular, as they appeal to investors seeking income. MLPs are partnerships that generate most of their income from the natural resources sector, and because they often pay hefty dividends, they’re particularly attractive in the ultra-low interest rate environment that has prevailed since the market crash of 2008.
What’s more, since they make money from fees from businesses such as energy pipelines rather than from the underlying commodities themselves, MLPs have relatively steady income, even when commodities prices bounce around with volatility.
A Natural Gas MLP In The Works Too
In the same SEC filing, ALPS also unveiled plans to market a new natural gas MLP ETF, the Alerian Natural Gas MLP ETF, which will also target tracking error with a similar methodology as its proposed new MLP infrastructure fund.
The natural gas strategy will track the Alerian Natural Gas MLP Index, which is a rules-based, equal-weighted index that hones in on natural gas infrastructure MLPs.
ALPS’ move comes less than a month after New York-based Global X Funds took a similar step, filing with the Securities and Exchange Commission paperwork to launch two MLP ETFs, one linked to infrastructure and the other to natural gas.
The company didn’t disclose fees and tickers for its planned funds. AMLP has an annual expense ratio of 0.85 percent, matching all the other securities in the MLP space.