After almost two years, ALPS Alerian MLP ETF (NYSE: AMLP) generates nearly the same daily trading value as JPMorgan Alerian MLP Index (NYSE: AMJ), although the indexes used by the two products are different.
While the JPMorgan ETN had the leeway to include exploration and production MLPs in its MLP index, the ALPS ETF includes only midstream infrastructure MLPs such as Energy Transfer Partners (NYSE: ETP), Enterprise Products Partners (NYSE: EPD) and Genesis Energy LP (NYSE: GEL).
Midstream master limited partnerships, the backbone of energy infrastructure in the US, offer a play on domestic energy with less volatility than exploration and production operations, which are exposed to fluctuating commodity prices.
Midstream MLPs are the toll takers of the energy industry; they get paid based on the volume of commodity product moved, rather than the price of the commodity produced. That makes for smoother revenue, while still providing exposure to energy production and demand and significantly reducing the ETF's price volatility.
The MLP ETF also tracks a much more concentrated basket of MLPs, with just 25 index components versus the 50 components in the ETN's basket. That more concentrated approach, coupled with the recent market sell-off, has boosted the yield on ALPS Alerian MLP ETF to just over 6 percent, about 2 percent higher than that currently offered by JPMorgan Alerian MLP Index.
While both the ETF and ETN publish their expense ratios as 0.85 percent, the way in which they calculate those expenses affect investor returns in different ways. ETFs collect fees according to current performance; some ETNs such as JPMorgan Alerian MLP use trailing performance, which means the fees collected can be based on significantly higher past net asset values (NAV), rather than current NAVs.
ETN investors can end up paying a high amount based on past gains, even if recent performance is poor. That expense model can introduce tracking error into an ETN, which in the case of JPMorgan Alerian MLP Index amounted to 2.3 percent over the past year.
The upshot: The Alerian ETF has a higher yield and less risk than its ETN peer.
Disclosure: I am long EPD.