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Why MLPI Underperformed AMLP in the September 11 Week

Ruth King

Weekly Update: 7 Energy MLP Securities Investors Should Track

(Continued from Prior Part)

MLPI ETN

The ETRACS Alerian MLP Infrastructure Index ETN (MLPI) fell 4.30% in the week ending September 11. It’s 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%. It’s accrued daily. MLPI traded at a yield of 6.30% on September 11.

MPLI underperformed both the broad-market SPDR S&P 500 ETF Trust (SPY) and the Energy Select Sector SPDR ETF (XLE). SPY rose 2.10% and XLE fell 0.70% 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 DCP Midstream Partners (DPM). Currently, DCP Midstream Partners forms ~2% of the index. Petroleum transportation MLP constituents include Buckeye Partners (BPL) and NuStar Energy (NS). Together, they form ~8% of the index.

ETFs and ETNs

ETNs are senior unsecured debt securities. ETN investors are exposed to the issuer’s credit risk—in MLPI’s case, it’s UBS. ETNs offer investors an easy way to gain exposure to different market indices. The coupons associated with the 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 discussed in the last part of this series, AMLP fell 2.90% in the week ending September 11. Although there’s credit risk associated with ETNs, investments in ETFs are exposed to tracking error. Tracking error measures the difference in returns between the ETF and its benchmark index over the most recent one-year period.

The above graph compares the returns of MLPI against those of AMZI and AMLP in the week ending September 11. It’s important to note how closely MLPI tracks AMZI, as opposed to the wider tracking error that AMLP displays.

MLPL ETN

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%. This is the same as MLPI.

As the above graph shows, MLPL fell 8.80% in the week ending September 11. In comparison, AMZI fell 4.30% during the week. MLPL traded at a yield of 19.30% on September 11—compared to MLPI’s 6.30%.

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