Several readers have emailed wanting to know about investing in MLPs via ETFs/ETNs. While I have not used them in my course of business, ETF Trends had this to say in “MLP ETNs: Another Source of Income?”
Income-focused investors have been looking for new sources of dividends and interest, since yields are low, low, low. There is an alternative exchange traded note (ETN) investment that many investors could be overlooking.
Master Limited Partnerships (MLPs) have nice income streams and can also add growth to a portfolio. Ron Rowland for Money and Markets explains that MLPs concentrate on the storage and transportation of energy products, such as tank farms and pipeline companies.
While you can invest in MLPs directly, ETNs may be a better way to get your exposure. They give your portfolio more diversified exposure and the tax treatment is more favorable. Investing directly in MLPs can generate K-1s, a hassle many investors may not want to deal with.
However, with an MLP ETN, you do not own the companies in the index, you own a bond issued by the bank whose return is tied to the index.
Let’s take a look at AMJ, which is the JP Morgan Alerian MLP Index ETN. Since it covers energy limited partnerships, I have compared it to XLE, the well known energy ETF:
Interestingly enough, AMJ outperformed XLE by a wide margin. Daily volume is decent with an average of $16 million being traded. The current yield is 4.24%, according to Morningstar, while the bid/ask spread is 2 cents.
Over the past year, this ETN would have given you a nice bang for the buck along with a decent dividend. As you can see from the chart above, volatility can be an issue, although AMJ has held up better than XLE.
Nevertheless, if you consider AMJ as an addition to your portfolio, be sure to use my recommended sell stop discipline.
Disclosure: No holdings in the above funds