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Monday August 02, 2010
Investing in MLP funds: AMJ, MLPI, MLPL
by Benjamin Shepherd, contributing editor Personal Finance  In this low-rate environment, master limited partnerships (MLP) have attracted a great deal of investor attention which, in turn, piques the interest of asset managers. Three new MLP-focused funds have launched this year, and several more are in the works that will track specific segments of the market. Although JPMorgan Alerian MLP Index ETN (AMJ) hasn’t produced stellar gains, its 9.6 percent return since its addition to the Fund Portfolio in March is more than respectable in a period when the S&P 500 declined 7.5 percent. A major contributor to that solid performance is the fund’s better than 5 percent yield. Not long after the inclusion of the JPMorgan Alerian MLP Index ETN in the Portfolio, UBS launched UBS E-TRACS Alerian MLP Infrastructure Index (MLPI). The fund tracks a basket of 25 midstream energy infrastructure MLPs, many of which, such as Growth Portfolio denizen Enterprise Products Partners LP, Kinder Morgan Energy Partners LP and Enbridge Energy Partners LP. 
As midstream players, these partnerships are largely immune to commodity-price swings; they’re paid based on contract rates for the volume of oil and natural gas moving through their pipelines. With extremely predictable revenue streams and payouts, this sort of fare is wildly popular among individual investors; in just a few months UBS E-TRACS Alerian MLP Infrastructure Index has already attracted more than $44 million in assets. This success encouraged the manager to launch UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL) in the first week of July. Seeking to double the performance of the underlying index it shares with its unleveraged cousin, the exchange-traded fund could offer yields in excess of 12 percent. Although the prospects of a 12 percent yield are enticing, investors would do well to avoid the fund. No yield is guaranteed, but the payouts from this offering appear particularly vulnerable to changes in the index’s composition. And the fund’s performance could be a bit unpredictable relative to its index because the fund resets its portfolio monthly, not daily, to adjust for market changes. Prospective investors should understand that the fund has plenty of room for tracking error. Unless you’re a short-term trader playing off a specific event, avoid UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index. However, if you’re looking for targeted exposure to midstream MLPs, unleveraged UBS E-TRACS Alerian MLP Infrastructure Index is an excellent option. Still, the sector as a whole remains attractive--particularly in the wake of the Gulf of Mexico spill. The costs of deepwater drilling are almost surely going to be much higher going forward, creating a lot of opportunity for onshore producers and pushing energy prices higher. With that outlook in mind, JPMorgan Alerian MLP Index ETN remains our favorite way to gain exposure to midstream MLPs; despite some new competition, the exchange-traded note is a buy at current prices. Learn more about this financial newsletter at Personal Finance. |
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