JPMorgan Chase & Co. (JPM:US)’s exchange- traded note tied to energy companies organized as partnerships rose to a record number of shares as investors look for higher yields with interest rates reaching record lows.
Shares outstanding of the JPMorgan Alerian MLP Index ETN (AMJ:US) climbed to 113 million on May 29. The security, the largest U.S. ETN, has a market capitalization of $4.2 billion, which makes up almost 24 percent of the entire ETN market. Master limited partnerships, which trade publicly, typically invest in assets ranging from pipelines to ships transporting commodities.
Demand for notes tied to MLPs has surged as new technologies such as hydraulic fracturing increase oil and gas production, said Ethan Bellamy, a Robert W. Baird & Co. equity analyst. ETNs tied to MLPs also benefit because they are more tax efficient than investing directly into the partnerships since buyers may have to file separate tax returns in each state a partnership does business, Bellamy said.
“The real simple reason is yields are low everywhere else and MLPS are still offering, depending on the product, 5 to 7 percent” in distributions, which are like dividends, Bellamy said in a telephone interview from his office in Denver.
That growth may continue since alternative securities that track MLPs make up about 7 percent of the overall market capitalization of the partnerships, Bellamy said.
“You can easily see the assets under management in all these alternative products double or triple from here.”
The JPMorgan ETN tracks a gauge of 50 publicly traded partnerships, which don’t pay federal income taxes and rely on assets, such as pipelines, to generate cash flow for taxable payouts to holders. The note matches dividends from the Alerian MLP Index minus a 0.85 percent management fee, according to a prospectus filed with the Securities and Exchange Commission.
ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand typically doesn’t affect the price since the ETNs track the performance of an index.
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