Can The Alerian MLP ETF And Its 8% Expense Ratio Really Be Trusted Anymore?
Sep. 29, 2014 6:32 PM • amlp
- The Alerian MLP ETF is currently the largest in the MLP space but modest performance and a staggering expense ratio should have you steering clear.
- Alerian is accruing a billion dollar plus tax liability and it's shareholders that will need to foot the bill.
- The ETF has a four year history but only recently acknowledged its true expense ratio that takes into account its tax liability.
MLP investors, beware! The wool may be getting pulled over your eyes.
Alerian is one of the heavy hitters in the MLP and no ETF is bigger or more frequently traded than the Alerian MLP ETF (NYSEARCA:AMLP ). With assets of over $9 billion, it holds some of the biggest names out there like Kinder Morgan Energy Partners (NYSE:KMP ) and Magellan Midstream Partners (NYSE:MMP ). MLPs are known for their oversized yields and the Alerian ETF is no exception. With an annual yield of 5.9%, it currently ranks as the 3rd highest yield of 23 MLP ETFs according to the ETF Database.
But there's one little detail that's being glossed over in all of this - its expense ratio. At a staggering 8.56%, the Alerian MLP ETF's expense figure ranks
it as the highest among those same 23 MLP ETFs. What's worse is that Alerian didn't even acknowledge this figure - keep in mind that this fund's inception date is 2010 - until just recently.
For a detailed explanation of what happened at Alerian and why the true expense is not just being recognized, I recommend reading this great article from Ron Rowland. as he explains it quite clearly. Let me summarize the main points here. The Alerian MLP ETF is structured as a C corporation and as such incurs tax liabilities. These liabilities should be figured into the ETF's overall expense ratio since shareholders are footing the bill to pay for these liabilities. Alerian didn't take any tax liability figure into account and published an expense ratio of 0.85% instead. Investors have been under the impression that this figure is the true expense ratio (unless they are more sophisticated investors, like Mr. Rowland who does the calculations themselves, but I'm guessing that's a very small percentage). How the SEC let this slide is still unclear.
So investors in this ETF have essentially been duped. That is unless they've been examining the ETF's performance against its stated benchmark - the Alerian MLP Infrastructure Index. Take a look at the table below that comes directly from Alerian.
AMLP - PERFORMANCE
QUARTERLY PERFORMANCE as of 06/30/2014