Dion's Weekly ETF Blog Wrap

NEW YORK (TheStreet) -- Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog, anticipating which ETFs will be in play next.

Here are three of his blogs from the past week.

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AMLP Blasts Off

Published 8/31/2010 2:32 PM EDT

Launch? Try blast off. Since its debut just a week ago, the ALPS Alerian MLP ETF(AMLP) has attracted $33.7 million in total assets, with more than a million shares crossing the tape in most trading sessions. While I expected no less from the newest MLP (master limited partnership) fund, it's certainly worth looking at why AMLP is off to such a strong start and what differentiates it from its peers.

In an industry where first-mover advantage is certainly important, AMLP joined a crowded field. In a breathtakingly short time, five exchange-traded MLP products had already hit the market, all packaged as ETNs. While the JPMorgan Alerian MLP ETN(AMJ) led the way more than a year ago, investors also have the UBS E-TRACS Alerian MLP Infrastructure Index(MLPI), the Credit Suisse Cushing 30 MLP Index ETN(MLPN), the UBS E-TRACS 2x Alerian MLP Infrastructure Index ETN(MLPL) and the UBS E-TRACS Alerian Natural Gas MLP Index ETN(MLPG) at their disposal.

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What makes AMLP different? As AMLP is packaged as an ETF, it tracks a basket of MLP and cash investments, not unsecured debt obligations (as is the case with ETNs). As opposed to MLP ETNs, AMLP will not be subject to the credit rating of its issuer. Investors will appreciate the fact that both MLP ETNs and AMLP avoid the complicated K1s usually associated with MLP investments. AMLP's top five holdings are Enterprise Products(EPD), Kinder Morgan Energy Partners(KMP), Magellan Midstream Partners(MMP), Plains All American Pipeline(PAA) and Enbridge Energy Partners(EEP).

Before you run out to buy AMLP, however, you should know there's some fine print. As AMLP is structured as an ETF, there are tax implications that you don't have to face if you use one of the ETN funds. In the prospectus for AMLP, issuer ALPS mentions a "potential substantial after-tax tracking error from index performance" that could result from the tax treatment of underlying holdings. To quote the prospectus directly:

"AMLP is taxed as a regular corporation for federal income tax purposes and as such is obligated to pay federal and applicable state and foreign corporate taxes on its taxable income. This differs from most investment companies, which elect to be treated as "regulated investment companies" under the tax code in order to avoid paying entity level income taxes. Under current law, AMLP is not eligible to elect treatment as a regulated investment company due to its investments primarily in MLPs invested in energy assets. As a result, AMLP will be obligated to pay federal and state taxes on its taxable income as opposed to most other investment companies which are not so obligated."

What does this mean to you, the investor? AMLP will generally compute deferred income taxes based on the federal income-tax rate applicable to corporations. Currently, this rate is 35%. State taxes will also be involved.

Are the extra taxes associated with AMLP worth it to avoid the credit risk associated with ETNs? I've always preferred the ETF structure. I like the idea that you own shares in a corporation that holds the underlying securities, like when you buy AMLP, rather than owning unsecured debt obligations of a bank like JP Morgan(JPM), Credit Suisse(CS) or UBS(UBS). The taxes on AMLP are significant, however, so each investor should evaluate the decision thoroughly before scooping up a fund.

Time will tell how much AMLP's tax structure derails its market price. Here's something I can predict, though: Investors will see more and more MLP ETFs and ETNs (there are already more in the pipeline), and there will soon be even more discussion about how these products will impact the market for MLPs themselves.

At the time of publication, Dion Money Management held no positions in the stocks or ETFs mentioned.