“The sector also offers some diversification benefits, as it is only loosely correlated to other income-focused asset classes,” writes Morningstar analyst Abby Woodham in a profile of AMLP. “MLPs are less volatile than the S&P 500 and significantly less volatile than mid-cap energy equities because their fees are charged based on volume, not unstable commodity prices.”
However, she points out the ETF has significantly lagged its index since inception.
“The problem stems from federal regulations that prevent open-ended funds from holding more than 25% in MLPs. To get around this restriction, AMLP is structured as a corporation and pays income tax at the corporate level,” Woodham explains.
“Any taxable income from the underlying MLPs is an annual tax liability, and upon the sale of the portfolio’s shares the fund must also pay up at the corporate level. AMLP accounts for these tax liabilities in the net asset value, so although AMLP’s prospectus expense ratio is 0.85%, its gross expense ratio (which accounts for these tax liabilities) is close to 5%,” the analyst noted. [Morningstar Warning on MLP ETF]
Other exchange traded products for MLPs include JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), Global X MLP ETF (NYSEArca: MLPA), Yorkville High Income MLP ETF (NYSEArca: YMLP), Credit Suisse Master Limited Partnerships ETN (NYSEArca: MLPN), Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY) and UBS ETRACS Wells Fargo MLP Index ETN (NYSEArca: MLPW).
Full disclosure: Tom Lydon’s clients own AMLP.