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Alerian MLP ETF's Little Secret

About $128 million can't be wrong, or can it?

Since its launch on Aug. 25, the Alerian MLP ETF (AMLP) has attracted an impressive amount of assets, nearly $128 million in less than a month. However, shareholders appear to be oblivious to the fact that AMLP employs a 62.5% daily leverage factor, thereby giving shareholders a 37.5% daily haircut.

Upon its arrival, AMLP was heralded by scores of analysts as the best way for investors to gain access to the performance of master limited partnerships, more commonly referred to as MLPs. My voice was a lonely one, telling investors to beware because I believed the marketing materials were misleading and AMLP's structure would make its performance fail to meet its objective.

In my original analysis, "Beware of MLPs in ETF Wrappers: AMLP" , I alleged the corporate tax structure chosen by AMLP would be a hindrance to its performance vs. the "pass-through" structures of other exchange-traded funds and exchange-traded notes. I also argued the marketing materials were misleading because they claimed AMLP would track the underlying Alerian MLP Infrastructure Index before fees and total expenses of 0.85%. There was no accounting for the 35% corporate tax impact.

Representatives from both Alerian and ALPS, the fund's advisor and distributor, contacted me regarding the story and ALPS eventually provided a written response in late August. I published "ALPS Responds To AMLP Article" earlier this month. I don't believe they adequately addressed any of the concerns I raised, but I will let you read it for yourself and draw your own conclusions.

Part of their reply included the assertion that MLPs packaged inside an ETF had long eluded many financial institutions that had "been trying for years to unlock the secret to an (MLP) ETF, long before the ETN ever came out ... fortunately, MSSRS (Gabe) Hammond and (Kenny) Feng finally figured out the key to the ETF structure."

I have figured out the secret too -- AMLP's daily net asset value is calculated with a 62.5% leverage factor.

First of all, investors must understand that when ETFs track an index they employ leverage. In the vast majority of cases the leverage is 1 times (or 100%) and the ETF seeks to track 100% of the daily change of the underlying index. Many investors tend to think of ProShares and Direxion when the subject of leveraged ETFs is brought up, as those two sponsors provide many of the two times and three times leveraged products on the market.
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