Income investors who do not want, or who may not use, energy infrastructure securities that generate K-1 tax reports, can turn to energy infrastructure funds that generate 1099-DIV tax reports (or an ETN that generates a 1099-INT). Let’s look at price appreciation expectations and yield for an example of each of four approaches to investing in energy infrastructure portfolios:
- AMLP: passive index ETF, generating a 1099-DIV
- EMLP: active, unleveraged ETF, generating a 1099-DIV
- KED: active, leveraged CEF, generating a 1099-DIV
- AMJ: passive index ETN, generating a 1099-INT
YIELD AND PRICE APPRECIATION EXPECTATIONS:
The figures after each symbol below are presented in this order: Yield/Price Appreciation/Yield+Appreciation. These are not necessarily our predictions, but they are the composite “street” predictions.
The yields are from Morningstar, except for EMLP. The predicted yield for EMLP is based on the yields of the individual portfolio holdings weighted for the weight of the security in the portfolio, less the 95 basis point management fee.
The price appreciation expectation for KED is from the “street” consensus by Thompson/FirstCall. The predicted price appreciation from AMLP, EMLP and AMJ are based on the 1-year target price versus current market price according to the “street” consensus by Thompson/First Call for each individual portfolio holding weighted for the weight of that security within the portfolio.
- AMLP: 6.24% / 6.3% / 12.5%
- EMLP: 3.12% / 10.7% / 13.8%
- KED: 6.48% / 6.7% / 13.2%
- AMJ: 5.35% / 17.3% / 22.7%
AMLP (passive index ETF, generates 1099-DIV)
“The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index… The Fund employs a “passive management” – or indexing – investment approach designed to track the performance of the Index. The Index is a rules based, modified capitalization weighted, float adjusted index intended to give investors a means of tracking the overall performance of the United States energy infrastructure Master Limited Partnership (“MLP”) asset class.”
EMLP (active, unleveraged ETF, generates 1099-DIV)
“The Fund will invest primarily in publicly-traded master limited partnerships and limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, Canadian income trusts and their successor companies, pipeline companies, utilities, and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries.”
KED (active, leveraged CEF, generates 1099-DIV)
“KED is a closed-end fund that invests principally in debt and equity securities of privately-held energy-related master limited partnerships (MLPs), publicly-traded MLPs, and other energy companies. KED’s objective is to generate both current income and capital appreciation for its shareholders. MLPs are publicly traded limited partnerships. Energy-related MLPs own domestic infrastructure assets that are used in the gathering, processing, transportation, storage, refining and distribution of energy-related commodities. … The 1940 Act requires investment companies to have minimum debt and total leverage (debt and preferred stock) coverage ratios of 300% and 200%, respectively, at the time of a common stock dividend declaration. The Company’s borrowing agreements contain similar restrictions and require it to have a minimum coverage ratio of 300% as of the last day of each month.”
AMJ (passive index tracking ETN, generates 1099-INT)
“Alerian MLP Index Exchange Traded Notes (“ETNs”) provide investors a way to gain exposure to midstream energy MLPs. The ETNs pay a variable quarterly coupon linked to the cash distributions paid on the MLPs in the index, less accrued tracking fees … Investors can trade the ETNs … or receive a cash payment at the scheduled maturity…The ETNs are senior, unsecured obligations of JPMorgan Chase & Co.”
TOP TEN HOLDINGS OF EACH PORTOLIO (data as of 01/03/2012):
LINKS TO 3-YEAR CHARTs OF PUBLIC SECURITIES IDENTIFIED:
The tax treatment of each of the “funds” (AMLP, EMLP, KED, and AMJ) are discussed in some depth in their respective prospectuses. Click links to view access prospectuses.
QVM Group LLC has positions in AMJ and EMLP as of 01/03/2013.