NEW YORK (
) -- Don Dion posts his current insights on the stock, bond, commodity and currency markets in his
blog, anticipating which ETFs will be in play next.
Here are three of his blogs from the past week.
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
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
led the way more than a year ago, investors also have the
UBS E-TRACS Alerian MLP Infrastructure Index
Credit Suisse Cushing 30 MLP Index ETN
UBS E-TRACS 2x Alerian MLP Infrastructure Index ETN
UBS E-TRACS Alerian Natural Gas MLP Index ETN
at their disposal.
> > Bull or Bear? Vote in Our Poll
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
Morgan Energy Partners
Magellan Midstream Partners
Plains All American Pipeline
Enbridge Energy Partners
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
. 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.
Seize U.S. Agricultural Success
Published9/2/2010 11:16 AM EDT
Investors got some news this week that makes the
PowerShares DB Agriculture ETF
an even more compelling longer-term investment for late 2010. This PowerShares product, which tracks a combination of U.S. export crops, is set to get a boost this month as U.S. farmers ship what is estimated to be the second-greatest amount of agricultural products ever recorded.
According to federal estimates of farm trade, released Tuesday, U.S. farmers will ship $107.5 billion in agricultural products abroad in the fiscal year that ends Sept. 30. Next year, ag exports are expected to total $113 billion, as emerging-market demand couples with crop devastation abroad.
If futures-backed commodity funds are really under threat, as I've
, what makes DBA different? For one, DBA's underlying basket contains a well-balanced variety of commodities, rather than focusing on a single commodity like the
United States Natural Gas ETF
. By diversifying holdings and being proactive about regulatory limits, DBA managers have an excellent chance of avoiding the creation curbs that many similar funds have faced and will continue to face.
In an uncertain economic climate, I believe that DBA is a solid bet on growing exports in both the short and long term.
At the time of publication, Dion Money Management owned DBA.
Like Tech? Try FDN
Published 9/2/2010 2:37 PM EDT
Having recently read about and marveled at
new product line,
new Kindle and an upcoming "smartphone" ETF from First Trust, I've been thinking a lot about digital devices and the world they open up to consumers.
Whether it's though an iPhone, iPad or BlackBerry, consumers are charging up and tuning in. There's a lot of debate out there about which digital device is superior, and I'm not going to pretend I know the answer. (In 2005, I would have said
, which shows you how much I know.)
I believe the trend is all about having the Internet at your fingertips. If you bet on Apple's iPhone or
Research In Motion's
BlackBerry, you could be betting on the wrong device. I believe the safer investment is in the continued growth of the Internet itself and the companies that thrive in its territory.
I've mentioned the
First Trust Dow Jones Internet ETF
before, and even listed
five reasons to own the fund. As I keep reading about tech, however, my conviction is just growing stronger. I still think the firms in this ETF have tremendous potential.
all headline this well-balanced fund that tracks companies making money on the Internet.
Here's the call: If you already own FDN, I wouldn't sell yet (despite the run today). If you haven't discovered this unique ETF yet, I'd wait for a pullback to buy and make the investment with your long-term portfolio in mind.
People call me all the time looking for unique ETF investment ideas -- FDN is always at the top of my list.
At the time of publication, Dion Money Management was long FDN.
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.