NEW YORK (
) -- The
JPMorgan Alerian MLP Index ETN
(AMJ) offers investors exchange traded exposure to the natural gas marketplace without the problems of
United States Natural Gas
Although AMJ is less of a "pure play" on natural gas prices than UNG or even
First Trust ISE-Revere Natural Gas
, it's much more predictable over the long term.
AMJ's investors gain access to the natural gas market through the stocks of companies that store and transport natural gas, many of which are structured as Master Limited Partnerships. While this exchange traded product comes with the risks of exchange traded notes, it is large and liquid, allowing investors to trade in and out of the fund with relative ease.
The companies that AMJ tracks are well diversified businesses involved in natural gas pipeline and storage. According to the fund's fact sheet, the top five holdings in the fund are
Kinder Morgan Energy Partners
Enterprise Products Partners
Plains All American Pipeline
Energy Transfer Partners
Energy Transfer Equity
These firms are a sort of "tax collector" as natural gas passes through the system, taking a toll even when natural gas prices are low. Natural gas is currently in huge supply at low prices. Eventually this price discrepancy, along with cold weather, hurricanes, or other typical drivers, will push consumers toward natural gas.
UNG's structure aims to track natural gas prices at the risk of
, while AMJ tracks MLP's at the risk of issuer J.P. Morgan. AMJ is a collection of debt notes, rather than equity, which exposes the fund to the credit risk of its issuer. AMJ was originally launched by Bear Stearns under the symbol BSR, but changed its symbol when J.P. Morgan took over and relaunched the index on June 2, 2009.
Rather than having to roll futures contracts month to month like UNG, AMJ is designed for investors seeking income. The MLPs that AMJ tracks are designed to pass on earnings to investors through their dividends. AMJ's quarterly dividend amounted to 43.6 cents in August. This payout is similar to the dividend that BSR paid in the past, setting AMJ up to yield around 7%.
ETNs are structured for savvy investors, because of the added risk. This risk, however, pales in comparison to the problems over at UNG. As UNG fights to
and expand, it is exposing investors to increasingly risky derivatives. AMJ is much more suitable for conservative investors looking to make income over time.
Another added benefit for AMJ investors is the tax structure of the fund. MLPs pass their income through to investors, which results in a K-1. Since AMJ is an ETN, it issues a 1099, allowing investors to avoid the K-1. Do-it-yourself tax preparers will appreciate the difference between these two forms.
While UNG, FCG and AMJ offer unique perspectives on the natural gas marketplace, UNG tracks spot prices, FCG tracks producers and AMJ tracks MLPs. Of these funds, AMJ is the most appropriate for savvy income investors. The "toll booth" firms that underlie AMJ will continue to pick off the flow of natural gas and continue to be indispensable participants in the energy marketplace.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion does not own any of the ETFs mentioned in the article.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.