Head To Head: ALPS Alerian MLP ETF Vs. JPMorgan Alerian MLP Index

Includes: AMJ, AMLP, EPD
by: Benjamin Shepherd

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.