Alerian MLP ETF (AMLP), the first ETF structured as a C corporation, issued a prospectus update on March 31, 2013 (PDF). Total annual fund operating expenses decreased from 4.86% to 4.85%, resulting in a non-perceptible change that did not warrant a company press release. Furthermore, the document now identifies the bulk of these expenses as a "Deferred Income Tax Expense" rather than the previous label of "Other Expenses."
However, the footnotes explain this is just an "estimate," because any estimate of deferred income tax expense "cannot be reliably predicted." Their words, not mine. They are essentially claiming it is an estimate of something that cannot be estimated. The document further contradicts itself by stating, "The Fund's accrued deferred tax liability, if any, is reflected each day in the Fund's net asset value per share." In other words, it's not an estimate at all and is known with enough precision to clip the NAV daily and issue an updated intraday NAV every 15 seconds.
Additionally, the 4% estimate has been far too low. According to AMLP's performance data page, AMLP has trailed its index by 28.36% since inception through March 31. This equates to 8.44% per year. Since AMLP's stated objective is to track the index less fees and expenses, then fees and expenses must total 8.44% per year. Therefore, my estimate of the deferred income tax expenses that shareholders have paid since inception is closer to 7.59% per year (8.44% underperformance minus 0.85% management fee).
According to AMLP's holding data for May 2, 2013, AMLP has now taken $443,228,015.21 from shareholders to pay the fund's taxes. This is in addition to the taxes AMLP has already paid. For most ETPs, investors scrutinize expense ratios closely, questioning every 0.1%. AMLP shareholders seem to be either oblivious, blinded by the yield, or think 7.59% per year is a fair price to avoid a K-1 statement.
Disclosure: Long AMJ. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.