There are many exchange traded products for investors to choose from as they look to add energy infrastructure exposure to their portfolios, but the first step is deciding between an exchange traded fund and an exchange traded note.
The first two ETPs launched in the energy infrastructure space notably utilize different structures: the Alerian MLP ETF (AMLP) is an ETF, while the J.P. Morgan Alerian MLP Index ETN (AMJ) is an ETN.
Both ETFs and ETNs trade on an exchange and are designed to track an underlying asset, but that’s where the similarities end. Knowing the nuances between the ETPs can help investors make an informed decision on which structure is a better fit for their portfolios.
The first ETF was launched in 1993, whereas ETNs did not exist until 2006, when Barclays Bank developed the structure to make it easier for retail investors to invest in hard-to-access instruments, particularly within commodities and currencies.
ETNs are senior, unsecured debt securities issued by a bank that, unlike ETFs, do not own the underlying assets that their return tracks. The return of an ETN is linked to a market index or other benchmark.
At maturity, MLP ETNs that were created prior to 2018 will pay the full value of the index, minus the management fee. However, MLP ETNs incepted in 2018 or later take the fee out of NAV. While tracking error can be a concern with ETFs, ETNs eliminate tracking error entirely.
While ETNs generally do not pay any dividend or interest rate payments to investors because they do not hold any portfolio securities, MLP ETNs do pay a variable coupon linked to the cash distributions paid on the MLPs in the index.
Another consideration unique to ETNs is credit risk. Since ETN investors do not own any of the underlying securities in the index they track, they have to evaluate the creditworthiness of the issuer.
Finally, ETNs are less liquid than ETFs, which may be a concern for some investors. While ETPs are popular products, trading volumes vary, which can affect liquidity.
In addition to AMLP, another energy infrastructure ETF is the Alerian Energy Infrastructure ETF (ENFR).
Aside from AMJ, other ETN offerings include the ETRACS Alerian Midstream Energy Index ETN (AMNA), the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB), and the ETRACS Alerian Midstream Energy Total Return Index ETN (AMTR).
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, AMJ, ENFR, AMNA, MLPB, and AMTR, for which it receives an index licensing fee. However, AMLP, AMJ, ENFR, AMNA, MLPB, and AMTR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, AMJ, ENFR, AMNA, MLPB, and AMTR.