UBS Continues Expansion in MLP ETF World, Launches AMU - ETF News And Commentary
19 Juli 2012 - 12:39PM
Zacks
Over the past few years, MLP investing has become extremely
popular. A variety of investors are looking for options in the
space thanks to high dividends and generally lower levels of
volatility that many of the firms in this corner of the market
possess.
Thanks to this increase in demand, a number of ETF issuers have
stepped up to the plate in order to fill the void, offering
investors a number of choices in the segment including ones
targeting the broad space, high income, and natural gas markets.
Yet, even with a double digit number of products in the space,
issuers seem undeterred and are ready and willing to launch more in
the segment, including UBS’ latest debut, the ETRACS
Alerian MLP Index ETN (AMU).
This brand new note looks to track the Alerian MLP Index which
is a composite benchmark of 50 publically traded energy MLPs. The
benchmark uses a float adjusted cap weighting system and the ETN
will charge investors 80 basis points a year in tracking fees (read
Oil Bull Market is no Place for MLP ETF Investors).
In terms of exposure, the product seems to be rather
concentrated in its top holdings, as the top three account for
31.8% of the total assets. These three firms include
Enterprise Products Partners (EPD), Kinder
Morgan Energy Partners (KMP), and Plains All
American Pipeline (PAA).
Investors should also take note of the structure of the product
as an ETN. This means that the note operates as a senior
unsubordinated debt security of UBS and carries the credit risk of
the firm. However, since it is a note and doesn’t actually hold the
underlying, a K-1 isn’t required come tax time, meaning that tax
headaches will be minimal for AMU (read ETFs vs. ETNs: What’s The
Difference?).
Those who are familiar with the space should know that AMU
actually follows the same index as the ultra popular JP
Morgan Alerian MLP Index ETN (AMJ). This product has over
$5 billion in assets and it trades more than 1.5 million shares in
a normal session.
Normally, this would present a huge problem for AMU, as although
the UBS note is cheaper than AMJ by five basis points, the three
year lead and impressive asset total for the JP Morgan fund would
prove to be a difficult aspect to overcome, especially in such a
crowded space (see more in the Zacks ETF
Center).
However, this isn’t exactly a normal situation as AMJ recently
suspended new unit creations, pushing the product to a small
premium in recent sessions. In fact, according to IndexUniverse,
this reached about 2.5% at one point for sliding back to near break
even in recent sessions.
So, it is very possible that one of the main catalysts for the
launch of AMU was its ability to act as a counterbalance to AMJ and
its possible premium issues. For investors worried about AMJ
spiking to more of a premium or having the premium evaporate, AMU
is now a viable option, tracking the same index and with a cheaper
expense ratio to boot (read A Primer on ETF Investing).
Should the moratorium on new creations for AMJ end, the new UBS
note could have a rough time accumulating assets. However, there
are no indications at this time that this will be the case,
suggesting that AMU could develop a decent following among
investors looking to gain exposure to the Alerian MLP Index without
the hassles that are currently plaguing the JP Morgan product at
this time.
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JPM-ALERN MLP (AMJ): ETF Research Reports
(AMU): ETF Research Reports
ENTERPRISE PROD (EPD): Free Stock Analysis Report
KINDER MORG ENG (KMP): Free Stock Analysis Report
PLAINS ALL AMER (PAA): Free Stock Analysis Report
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