Lucrative yields offered by exchange traded notes (ETNs) that track energy-focused master limited partnerships (MLPs) are attracting more investors as the expansion of the nation’s energy infrastructure brings in more revenue for MLPs that rent out energy service facilities.
There are no MLP ETFs currently available. However, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) tries to reflect the Alerian MLP Index, which is up an average 11% per year over the last decade, report Tom Lauricella and Carolyn Cui for The Wall Street Journal. The rally in MLPs has depressed yields from 8.8% from a year ago to 6.3%. Any interest-rate increases could reduce dividend payouts. AMJ yields 5.34%. [Van Eck Files to Launch an MLP ETF.]
Despite the fact that the Index has returned 21% in 2010, observers are cautioning that the limited selection of MLPs available could make MLP funds vulnerable to any decline in prices. Currently, there are about 70 MLPs, with a total market value of around $200 billion. The Alerian Index weights puts 41% of total holdings into five companies.
MLPs are partnerships. The general partner is responsible for running the partnership while individual investors are limited partners, according to Harry Domash’s Dividend Detective. Income is allocated among all partners, proportionate to the percentage of ownership.
The term MLP generally only applies to businesses related to the use of natural resources; for example, the transportation or extraction of natural gas. In some instances, real estate can be MLPs. [All About MLPs.]
The big draw for MLPs is that they do not incur income taxes. Although, 90% of the MLP’s income needs to come from real estate, commodities or natural resource services and operations to qualify for the tax perks. It should be noted that MLPs may not be suitable for IRAs and other tax-sheltered portfolio (as always, contact your accountant for additional details on appropriateness and other tax issues). Additionally, MLPs have a low correlation to the rest of the U.S. stock market and U.S. Treasuries. [5 ETFs Demystified.]
For more information on master limited partnerships, visit our MLPs category.
There are a number of MLP ETNs available in addition to AMJ:
- Credit Suisse Cushing 30 MLP Index (NYSEArca: MLPN)
- UBS E-TRACS 2x Long Alerian MLP Infrastructure ETN (NYSEArca: MLPL): annual leveraged yield is 12.23%
- UBS E-TRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI): yield 6.87%
- UBS E-TRACS Alerian Natural Gas MLP ETN (NYSEArca: MLPG): yield 6.56%
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.