ALPS ETF Trust, the Denver-based ETF firm known as one of the
first firms to actively market ETFs, is planning to launch a new
and improved version of its Alerian MLP Infrastructure ETF
(NYSEArca:AMLP) to address the issue of tracking error.
The Alerian Plus MLP Infrastructure ETF will track the same
index benchmarking AMLP, but unlike its predecessor, it will seek
to minimize tracking error that stems from the fund's tax
structure. ALPS will address the fact that the ETF's index isn't
adjusted for taxes by "borrowing money from a bank and investing
the proceeds in component securities of the index," the filing
Returns on these borrowed funds should help reduce the
difference in performance between the fund and the index,
mitigating the tracking error caused by the daily accrual of a tax
liability, the company said.
ALPS' new infrastructure fund won't qualify as a registered
investment company (
) under the Internal Revenue Code of 1986, and will be taxed as a
regular corporation for federal income tax purposes, as is the case
AMLP was the first-ever MLP-based ETF made available to U.S.
investors, last summer. Up until that point, MLP strategies were
confined to the ETN format. The JP Morgan Alerian MLP Index ETN
(NYSEArca:AMJ), the space's biggest player, had $2.8 billion in
assets as of May 2, according to data compiled by
MLP-based funds are increasingly popular, as they appeal to
investors seeking income. MLPs are partnerships that generate most
of their income from the natural resources sector, and because they
often pay hefty dividends, they're particularly attractive in the
ultra-low interest rate environment that has prevailed since the
market crash of 2008.
What's more, since they make money from fees from businesses
such as energy pipelines rather than from the underlying
commodities themselves, MLPs have relatively steady income, even
when commodities prices bounce around with volatility.
A Natural Gas MLP In The Works Too
In the same SEC filing, ALPS also unveiled plans to market a new
natural gas MLP ETF, the Alerian Natural Gas MLP ETF, which will
also target tracking error with a similar methodology as its
proposed new MLP infrastructure fund.
The natural gas strategy will track the Alerian Natural Gas MLP
Index, which is a rules-based, equal-weighted index that hones in
on natural gas infrastructure MLPs.
ALPS' move comes less than a month after New York-based Global X
Funds took a similar step, filing with the Securities and Exchange
Commission paperwork to launch two MLP ETFs, one linked to
infrastructure and the other to natural gas.
The company didn't disclose fees and tickers for its planned
funds. AMLP has an annual expense ratio of 0.85 percent, matching
all the other securities in the MLP space.
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