In the week ended August 28, the Alerian MLP ETF (AMLP) rose 3.3% compared to its close on August 21, the previous week. In the same timeframe, the broad-market SPDR S&P 500 ETF Trust (SPY) rose 0.7% and the Energy Select Sector SPDR ETF (XLE) rose 3.5%. AMLP traded at a yield of 8.0% at the end of last week. The rise in crude oil prices during the week drove energy stocks up and MLP yields down.
AMLP constituents sensitive to commodity prices such as Targa Resources (NGLS), DCP Midstream Partners (DPM), and NGL Energy Partners (NGL) traded at lower yields at the end of the week due to the rise in oil prices. AMLP heavyweights Plains All American Pipeline (PAA) and Magellan Midstream Partners (MMP) also traded at lower yields, as the MLPs gained 8.2% and 7.5%, respectively, during the week.
The Alerian MLP ETF seeks to track the performance of the Alerian MLP Infrastructure Index (AMZI). AMLP currently holds 23 MLPs in its portfolio. Enterprise Products Partners (EPD) is its largest holding, and it forms 10.5% of the portfolio. The ETF invests in both natural gas gathering and processing MLPs, such as Western Gas Partners (WES) and EQT Midstream Partners (EQM), and petroleum transportation MLPs such as Tesoro Logistics (TLLP).
AMLP charges a management fee of 0.85%. The management fee is the fee paid to the manager of the fund—Alerian in this case. AMLP has a net expense ratio of 5.43%. The expense ratio indicates the percentage of a fund’s average assets paid out each year to cover the costs of managing the fund. It includes management fees, taxes, and any other operating expenses. In AMLP’s case, a deferred income tax expense of 4.58% is included in the expense ratio.
The above graph compares AMLP’s returns against those of the AMZI index, SPY, and XLE. The returns include dividends.
AMLP and its underlying index
As the graph above shows, AMLP’s weekly returns underperformed those of AMZI, the index that it tracks. At the end of Q2 2015, AMLP’s year-to-date return was -7.96%. AMZI’s corresponding return was -11.02%. But AMLP reported 5.57% in annualized returns over three years while AMZI’s annualized returns were 9.31%.
You should note that AMLP is taxed as a corporation for federal tax purposes. Its NAV (net asset value) is reduced for any deferred tax liabilities. AMZI’s returns don’t consider tax deductions. So AMLP’s returns lag when there’s positive movement in the ETF and the index. But AMLP tends to outperform its underlying index when both fall.