The evolution of exchange-traded funds (ETFs) includes bringing scores of income-generating classes to investors of all types. Investors that do want to stock pick among favored income asset classes such as master limited partnerships (MLPs) no longer have to. The Alerian MLP ETF (NYSEARCA:AMLP) is one of the funds that kicked off the MLP ETF movement.
Today, the Alerian MLP ETF is the largest MLP ETF with $10.7 billion in assets under management. AMLP’s popularity can be explained in one word: yield.
This fund sports a dividend yield of more than 8%, well above what investors will find on the S&P 500, traditional energy stocks or U.S. government bonds.
AMLP follows the Alerian MLP Infrastructure Index, which holds companies “that earn the majority of their cash flow from the transportation, storage, and processing of energy commodities,” according to issuer literature. “Thematically, MLPs represent an investment in the build-out of US energy infrastructure over the next few decades. MLPs own, operate, and build energy infrastructure assets such as pipelines, storage facilities, and processing plants.”
AMLP Isn’t as Cheap as It Appears
One of the big reasons investors love ETFs is low fees. So on that note, AMLP’s management fee of 0.85% per year, or $85 on a $10,000 investment, is more than triple the average ETF expense ratio and more akin to an actively managed mutual fund.
But wait, there’s more.
Due to the way AMLP is structured, this MLP passes off deferred tax liability (currently $276.8 million) to investors, adding another layer of expenses in the form of a deferred tax income expense of 0.57%.
In other words, AMLP’s true annual fees are at least 1.42%. There have been times during the fund’s almost seven years on the market that it has sported outrageous expenses well in excess of the aforementioned 1.42%.
The issue with AMLP is that it is structured as a C corporation, not a 1940 Act fund, which is the usual structure for ETFs. AMLP does this to skirt the 1940 Act rule stating that those funds can only allocate up to 25% of their holdings to MLPs, but that strategy also runs up investor expenses.
Investors should also note that AMLP does not have a large lineup. The big MLP ETF holds just 28 stocks, and its top five holdings combine for about 46% of its weight. The fund’s top holdings include Enterprise Products Partners L.P. (NYSE:EPD) and Magellan Midstream Partners LP (NYSE:MMP) at just more than 10% each.
Thus, overweighting is something of an issue with this fund.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.