The Exchange-Traded MLP Conundrum (Podcast)

by: Gary Gordon

Long-time readers know that I have always been a fan of pipeline partnerships. In fact, when presented with the opportunity to discuss one of my highest conviction investments years ago, I served up Energy Transfer Partners (NYSE:ETP).

As I explained at the time of the general recommendation, however, I never “buy-n-hold” any asset. It follows that as attractive as 5%-8% higher-yielding master limited pipeline partnerships may be, with the potential for slow-n-steady business growth over time, waning demand for all commodities has taken a toll.

Granted, JP Morgan Alerian ETN (NYSEARCA:AMJ) had been one of my diversified all-stars for three years. When an investment hits one of my pre-determined stop-limit loss orders or falls below a 200-day moving average, however, it becomes a sell candidate. Both events occurred in mid-May.

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AMJ 6 Months

There are several options after selling a portfolio position. One can consider the circumstances under which he/she would reacquire the same asset. Similarly, one can look elsewhere entirely, examining his/her “wish list” for potential bargain acquisitions. There’s also the choice to wait in the safety of cash for a better opportunity to arrive.

With regard to JP Morgan Alerian ETN (AMJ) today, the technical picture remains weak and the fundamental demand for the transportation of oil/natural gas is even weaker. The historical yields are attractive against comparable treasuries. On the other hand, plenty of other investments are less tethered to economic cyclicality. Note: Think PowerShares Emerging Market Sovereign Debt (NYSEARCA:PCY), PowerShares S&P Low Volatility (NYSEARCA:SPLV), Vanguard Intermediate Term Corporate Bond (NASDAQ:VCIT), iShares Preferred (NYSEARCA:PFF), iShares Mortgage REIT (BATS:REM) and so forth.

And then there’s deterioration in the attractiveness of JP Morgan Alerian ETN (AMJ) itself. The note provider has capped the dollar amount that the investment can take in. This effectively defeats the purpose of owning a diversified basket where the price reflects the net asset value (NYSE:NAV). Instead, there can be large premiums or large discounts for the privilege of ownership, much like the way a close-end fund operates.

The new decision on AMJ changes my view of the best way to get diversified exposure to pipeline partnerships in the future. Each of the three best alternatives - Alerian MLP ETF (NYSEARCA:AMLP), Yorkville High Income MLP (NYSEARCA:YMLP) and the Global X MLP (NYSEARCA:MLPA) - have drawbacks.

For example, Global X MLP (MLPA) may be the most attractive because it dons the lowest cost of ownership with an expense ratio of 0.45%. Yet MLPA often has a wide bid/ask spread making it more difficult to get in or get out at a desirable price point, particularly in periods of extreme volatility. There are also concerns related to double taxation that Ron Rowland talks about frequently.

AMLP also has issues related to double taxation, as well as an expense ratio that far exceeds MLPA. On the flip side, AMLP is far more liquid than MLPA.

In sum, I am not ready to recommit to any of the aforementioned exchange-traded vehicles. The new rules for JP Morgan Alerian ETN (AMJ) add an undesireable dimension to its use, while AMLP and MLPA have other issues. In essence, when the time for pipeline partnerships is right once again, I may revisit “old reliables” like Energy Transfer Partners (ETP), Enterprise Product Partners (NYSE:EPD) and/or Kinder Morgan Energy Partners (NYSE:KMP).

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.