Weekly Update of 7 Energy MLP Securities Investors Should Track
MLPI closely tracks AMZI
The ETRACS Alerian MLP Infrastructure Index ETN (MLPI) gained 3.6% in the week ended October 2. Issued by UBS Group (UBS), it closely tracks the Alerian MLP Infrastructure Index (AMZI), its underlying index. MLPI has an annual tracking fee of 0.85%, which is accrued daily.
MLPI outperformed both the broad market SPDR S&P 500 ETF (SPY) and the Energy Select Sector SPDR ETF (XLE). SPY rose 1.1%, and XLE rose 2.4% during the week.
The Alerian MLP Infrastructure Index invests in MLPs engaged in petroleum transportation, natural gas transportation, and gathering and processing. AMZI’s constituents in the natural gas gathering and processing segment include Enbridge Energy Partners (EEP). Petroleum transportation MLP constituents include Buckeye Partners (BPL) and NuStar Energy (NS).
ETFs and ETNs
ETNs (exchange-traded notes) are senior unsecured debt securities. ETN investors are exposed to the issuer’s credit risk. In MLPI’s case, this is UBS. ETNs offer investors an easy way to gain exposure to various market indices.
The coupons associated with ETNs are reported by investors as ordinary income on Form 1099 as opposed to K-1 forms required for investments in MLPs and some MLP ETFs.
Like MLPI, the Alerian MLP ETF (AMLP) also tracks AMZI. As we saw in the previous part of this series, AMLP rose 3.3% in the week ended October 2. Although there is credit risk associated with ETNs, investments in ETFs are exposed to tracking error.
The above graph compares the returns of MLPI against AMZI and AMLP returns in the week ended October 2. The three moved almost in lockstep to deliver similar returns over the week.
MLPL has greater risk
The ETRACS 2x Monthly Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) also uses AMZI as its underlying index. But MLPL provides 2x the long exposure to AMZI’s compound monthly performance. MLPL uses leverage to achieve this exposure. This makes it risky compared to MLPI. MLPL has an annual tracking fee of 0.85%, the same as MLPI.
As the above graph shows, MLPL rose 4.6% in the week ended October 2. In comparison, AMZI rose 3.6% during the week. MLPL traded at a yield of 21.3% on October 2 compared to MLPI’s 6.5%.
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