When looking to add exposure to an energy infrastructure index to their portfolios, investors may notice that most of the available offerings come in two forms: exchange traded funds and exchange traded notes.
Two of the largest funds offering exposure to energy infrastructure utilize different exchange traded structures: the Alerian MLP ETF (AMLP) and the J.P. Morgan Alerian MLP Index ETN (AMJ), which have $5.7 billion and $2.3 billion, respectively, in assets under management.
Knowing the nuances between the two structures can help investors make an informed decision on which structure is a better fit for their portfolios.
Both ETFs and ETNs track a benchmark index and trade on a stock exchange, but that’s where the similarities end.
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.
An ETN will pay at maturity the full value of the index, minus the management fee, completely eliminating tracking error, which can be a concern with ETFs — although it’s generally insignificant.
ETNs do not pay any dividend or interest rate payments to investors because they do not hold any portfolio securities, which means that ETN investors are not subject to short-term capital gains taxes like many dividend-paying ETFs and mutual fund investors.
An investor, however, is on the hook for a long-term capital gains tax when they sell the ETN.
Investors also have to evaluate the credit risk of the investment bank issuing the ETN, something that is not applicable to ETFs.
The last point for consideration is the importance of liquidity. ETNs are less liquid than ETFs.
In addition to AMLP, investors can access energy infrastructure exposure in an ETF structure with the Alerian Energy Infrastructure ETF (ENFR).
There are a few more options for investors looking to access energy infrastructure exposure in an ETN structure. Aside from AMJ, offerings include the ETRACS Alerian Midstream Energy Index ETN (AMNA), the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB), and others.
For more news, information, and strategy, visit the Energy Infrastructure Channel.