A Closer Look at Energy Infrastructure CEFs, ETN

Includes: EEP, ETP, FMO, KMP, TRP, TYG
by: Gary Gordon

The Bear Stearns Alerian MLP Select ETN (BSR) modified its name. It's now called BearLinx Alerian MLP Select ETN, so that investors may not associate the exchange-traded note with the Bear Stearns buyout last year.

Nevertheless, the investment still tracks the performance of 50 Master Limited Partnerships in the Alerian Select Index. The objective is to provide investors with a means to access the expansive energy MLP universe. And it currently yields about 6.5%.

Still, why would someone want to consider an exchange-traded note that carries the risk of default by the issuer? Isn't this associated with the failed Bear Stearns institution?

Yes... and no. Bear Stearns is now a division of J.P. Morgan. So technically speaking, the original issuer, Bear Stearns, did not go under. It just sold for a few rubles to JPMorgan Chase.

Moreover, the net asset value and actual share price of BSR have been pretty close throughout the past year. This would suggest that the market is not concerned with the debt of the issuer, whether it's that of a subsidiary called Bear Stearns or the larger JPMorgan Chase.

That said, I can't in good conscience consider this exchange-traded note, even though I am very fond of the energy Master Limited Partnership space. Instead, I think that energy infrastructure investors can look to the close cousin of ETFs/ETNs... the closed-end fund (CEF).

By way of review, infrastructure MLPs own/operate long-standing physical assets that transport or store natural resources. The pipeline industry isn't going anywhere, and many of the biggest players from Enbridge to Kinder Morgan to TransCanada (NYSE:TRP) are investing heavily in maintaining their territories.

At the moment, many individual MLPs are offering double-digit, 10%+ yields, including Enbridge Energy Partners LP (NYSE:EEP), Kinder Morgan Energy Partners LP (NYSE:KMP) and Energy Transfer Partners LP (NYSE:ETP). Of course, investing in an individual MLP may not achieve as much diversification as one might like.

So that brings us to the discussion of CEFs like the Fiduciary Claymore MLP Opportunity Fund (NYSE:FMO). It has a current distribution rate of roughly 12%, and is diversified clear across most of the big MLP names like the 3 listed above. (Note: The big drawback here is the possibility that fund management fees may siphon off 3% of the distribution yield.)

Another CEF possibility is the Tortoise Energy Infrastructure Fund (NYSE:TYG). The fees are much smaller than some MLP aggregators. Its dividend yield is 10.5%. Its one drawback, depending upon how one views leverage, is the fact that it does use leverage!

Energy mlp 50 day

With 10-year treasury bonds offering 2.75%, and diversified MLP baskets offering 6.5%-12%, that's a pretty significant yield spread. Historically, when the yield spread between MLPs and treasuries are greater than 3%, it's served as a pretty strong buying opportunity.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.