ALPS Plans First ETF In Field Of MLP Funds
June 11, 2010
ALPS Advisors, the Denver-based exchange-traded fund sponsor known as one of the first firms to actively market ETFs, filed for a new ETF based on publicly traded master limited partnerships (MLPs), a new development in a field of MLP exchange-traded products that up until now has been confined to ETNs.
The filing, dated June 10, didn’t specify the expense ratio or the ticker symbol for the new fund, the Alerian MLP ETF. It will track the Alerian MLP Infrastructure Index, a group of 25 MLPs that earn the majority of their income from the transportation and storage of energy commodities. The annual dividend yield of the Alerian MLP Infrastructure Index was 6.93 percent at the end of March.
MLP-based funds appeal to investors seeking income. The Alerian MLP ETF will join other MLP-based ETNs, including the JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), the UBS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) and the Credit Suisse Cushing 30 MLP Index ETN (NYSEArca: MLPN). All three products charge a 0.85 percent annual management fee.
The 10 largest constituents of the Alerian MLP Infrastructure Index at the end of March were either natural gas pipeline operators or petroleum transportation firms. All of the Alerian MLP Infrastructure Index’s components trade on either the New York Stock Exchange or Nasdaq.
Tax Issues And Tracking Error
Under current law, the ETF will have to pay applicable federal and state corporate income taxes on its taxable income as opposed to most other investment companies that aren’t obligated to do so, the filing said. That’s because the fund invests mostly in MLPs that own energy assets. However, the index is calculated without any deductions for taxes. As a result, the ETF’s after-tax performance could differ significantly from the index even if the pretax returns of both are closely correlated.
Tracking error in general is one big difference between an ETF and an ETN. ETNs are debt issues backed by the good faith and credit of the issuer. That means ETN investors incur credit risk, but also get the exact return of a given benchmark after fees, eliminating the tracking error often associated with ETFs.
MLPs themselves have favorable tax structures. They typically derive at least 90 percent of their income from interest, real estate rental or natural resources development. Because the Internal Revenue Service views shareholders of the MLP as “partners” in the enterprise, an MLP isn’t required to pay taxes at the corporate level and thus avoids double taxation of its income.
Arrow Investment Advisors will serve as the subadviser to the fund.