Alerian MLP Index Continues Its Winning Ways

| About: JPMorgan Alerian (AMJ)
This article is now exclusive for PRO subscribers.

Following its best year in history, the Alerian MLP index continues its winning ways. The Index is up 7% YTD and the comparable index including reinvested income is up 10½% while the Dow is lower.

Alerian MLP Index
Dec 31, 2009___285
Jun 18, 2010 ___304

Alerian MLP Index with reinvested income
Dec 31, 2009___755
Jun 18, 2010 ___834

This year the Alerian MLP Index was able to crawl ahead, like the market averages until May when it ran into a brick wall. The index sank from 319 to the 270s. Then MLP fans were attracted to higher yields on the index and brought it back over 300. MLPs continue to have strong investor support. But higher prices bring lower yields which can limit further advances.

Longer term, 10 years ago the Alerian MLP Index was 110. Since then its rise has been impressive while it provided an annual yield of 6-8%. Meanwhile the Dow is little changed with only modest annual dividends.

In 2010 the MLP business is expanding, moving energy over pipelines partially because more miles of pipelines are coming on line. Financing has been available. As in prior years, MLPS have found it relatively easy to sell units needed to build equity and expanded borrowings.

MLPs are attractive for hedge funds that appreciate high current income along with tax advantages. Hedge funds have been a key source for new capital, investing in numerous MLP offerings. But there is also a downside. 3 years ago the index reached its record at 342, then plunged 60 in 3 weeks. Because the index was known as a low beta investment (modest swings around the trend line), this drop was difficult for many MLP investors to understand. During this plunge, there was talk about indiscriminate panic selling of MLPs by fund managers. This was the first wave of the financial meltdown in late 2008. Money managers can be fickle. I am also worried about new energy regulation bills following the massive spill in the Gulf. Uncertainty about energy companies (including MLPs) and their profitability could bring on selling if investors demand higher rates of return.

Investors interested in MLPS who do not want to deal with the tax hassle associated with distributions may be interested in a fund designed to track the Alerian MLP Index:

JPMorgan Chase Capital XVI JP M (NYSEARCA:AMJ)

10 shares equal the index, giving it a value just over $30. The index yields 7.1% and the fund charges 0.85% administrative fees, netting about 6¼% rate for stockholders. The current "coupon" was just under 45¢. According to the fund manager:

The ETNs pay a variable quarterly coupon linked to the cash distributions paid on the MLPs in the index, less accrued tracking fees1. The ETN coupons are reported on Form 1099s and therefore eliminate the administrative burden associated with K-1 forms. Investors can trade the ETNs on the NYSE, Arca exchange or receive a cash payment at the scheduled maturity or upon early repurchase2, based on the performance of the index. The ETNs are senior, unsecured obligations of JPMorgan Chase & Co.

Disclosure: None