Over the past few years, MLP investing has become extremely popular. A variety of investors are looking for options in the space thanks to high dividends and generally lower levels of volatility that many of the firms in this corner of the market possess.
Thanks to this increase in demand, a number of ETF issuers have stepped up to the plate in order to fill the void, offering investors a number of choices in the segment including ones targeting the broad space, high income, and natural gas markets. Yet, even with a double digit number of products in the space, issuers seem undeterred and are ready and willing to launch more in the segment, including UBS’ latest debut, the ETRACS Alerian MLP Index ETN (AMU).
This brand new note looks to track the Alerian MLP Index which is a composite benchmark of 50 publically traded energy MLPs. The benchmark uses a float adjusted cap weighting system and the ETN will charge investors 80 basis points a year in tracking fees (read Oil Bull Market is no Place for MLP ETF Investors).
In terms of exposure, the product seems to be rather concentrated in its top holdings, as the top three account for 31.8% of the total assets. These three firms include Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP), and Plains All American Pipeline (PAA).
Investors should also take note of the structure of the product as an ETN. This means that the note operates as a senior unsubordinated debt security of UBS and carries the credit risk of the firm. However, since it is a note and doesn’t actually hold the underlying, a K-1 isn’t required come tax time, meaning that tax headaches will be minimal for AMU (read ETFs vs. ETNs: What’s The Difference?).
Those who are familiar with the space should know that AMU actually follows the same index as the ultra popular JP Morgan Alerian MLP Index ETN (AMJ). This product has over $5 billion in assets and it trades more than 1.5 million shares in a normal session.
Normally, this would present a huge problem for AMU, as although the UBS note is cheaper than AMJ by five basis points, the three year lead and impressive asset total for the JP Morgan fund would prove to be a difficult aspect to overcome, especially in such a crowded space (see more in the Zacks ETF Center).
However, this isn’t exactly a normal situation as AMJ recently suspended new unit creations, pushing the product to a small premium in recent sessions. In fact, according to IndexUniverse, this reached about 2.5% at one point for sliding back to near break even in recent sessions.
So, it is very possible that one of the main catalysts for the launch of AMU was its ability to act as a counterbalance to AMJ and its possible premium issues. For investors worried about AMJ spiking to more of a premium or having the premium evaporate, AMU is now a viable option, tracking the same index and with a cheaper expense ratio to boot (read A Primer on ETF Investing).
Should the moratorium on new creations for AMJ end, the new UBS note could have a rough time accumulating assets. However, there are no indications at this time that this will be the case, suggesting that AMU could develop a decent following among investors looking to gain exposure to the Alerian MLP Index without the hassles that are currently plaguing the JP Morgan product at this time.
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