Alternatives To The JPMorgan Alerian MLP Index ETN As Share Creation Limit Is Reached

| About: JPMorgan Alerian (AMJ)

The popular MLP index tracking exchange traded note, the JPMorgan Alerian MLP Index ETN (NYSEARCA:AMJ) has reached the limit of number of shares which can be issued. The lack of the ability for JPMorgan (NYSE:JPM) to issue more shares could lead to a supply/demand imbalance and out-of-line market pricing for the AMJ shares.

According to the JPMorgan website, the maximum number shares - notes - which can be issued for an ETN is 129 million. This week, the number of AMJ notes issued reached the limit, although JPMorgan continues to hold about 10 million of the notes. One reason why ETF and ETN shares have narrow share price to NAV spreads is the ability to issue more shares. That reason is now gone for AMJ. As a result, AMJ might start trading at a significant premium to NAV, reducing the yield from the ETN and exposing investors to potential losses even if the values of master limited partnerships and the Alerian MLP index continues to increase.

AMJ has become the largest MLP ETF/ETN primarily because the ETN structure works around the tax headaches of buying MLP shares directly or packaged investment products. With the share cap now reached for the JPMorgan MLP index ETN, AMJ may no longer be the efficient way to trade MLP values and capture most of the yield.

ETF and ETN Alternatives to AMJ

  • Alerian MLP ETF (NYSEARCA:AMLP) is the largest MLP ETF with $3.3 billion in assets. The fund has a current yield of 6.2% and the shares are at break-even for the last 12 months.
  • E-TRACS Alerian MLP Infrastructure ETN (NYSEARCA:MLPI) currently holds $232 million of assets. This ETN has a current yield of 5.2% and the unit price is up 4% over the last year.
  • Yorkville High Income MLP ETF (NYSEARCA:YMLP) is a newer fund with $37 million in assets. The fund yields 8.8% and was started in March 2012.

Closed-End Funds Investing in MLP stocks

My recent article: Consider MLP Focused Closed-End Funds For High Yields, Fewer Tax Headaches covered the half-dozen or so closed-end funds which invest in MLP units. The most attractive of the MLP CEFs are:

  • Clearbridge Energy MLP Fund (NYSE:CEM) which as a current yield of 6.8%. The CEM share value is down 1.4% over the last 12 months.
  • Nuveen Energy MLP Total Return Fund (NYSE:JMF) which yields 7.5%. The JMF share price has declined by 6.2% over the last year.

Most of the MLP investing ETFs and closed-end funds are organized as C corporations and must pay taxes on any capital gains and taxable portions of MLP distributions. Fortunately, the bulk of MLP dividends are classified as non-taxable return of capital. Review the tax nature of recent dividends of any of these funds in which you are contemplating an investment. Buying the MLP units direct instead of through funds will probably provide the best returns for your portfolio. In exchange you must comply with the extensive tax reporting requirements associated with K-1 forms. Investing in MLPs through an ETF or closed-end fund converts the earnings to being reported on a 1099.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.