Generate High Income by Investing in ETNs

david-frazier In a recent article I wrote for Weiss Educational Services on December 3, 2015, I told our readers how to generate a high level of income with relative safety, by investing in rather unknown dividend-paying securities Including: The Gabelli Equity Trust Inc. Series H Cumulative Preferred Stock (GAB-PH), Welltower Inc. (HCN) and Nuveen S&P 500 Buy-Write Income Fund (BXMX).

crude-oil-prices-fallingNow that my research indicates that oil prices are nearing a bottom, I felt the time has come to discuss some other relatively unknown dividend-paying securities that pay high yields – exchange-traded notes that invest in master limited partnerships (“MLPs”).

Exchange-traded notes (“ETNs”) are senior, unsecured debt securities issued by large investment banking firms. Like other debt securities, ETNs have a specific maturity date, and their interest and principal payments are backed by the credit of the issuer.

exchangetradednotesBecause those issuers tend to be very large, international investment banking firms, such as JPMorgan Chase & Co., Barclays and UBS, the financial backing provided by those issuers tends to be reliable during most investing environments.

Although ETNs are not equities or index funds, they share several characteristics of index funds. Similar to equities, they trade on U.S. securities exchanges and they can be sold short. Similar to index funds, ETNs are linked to the return of a benchmark index. But as debt securities, they don’t actually own anything that they are tracking.

Two ETNs that appear to be in the process of bottoming, and also pay relatively high cash distributions, are the JP Morgan Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure ETN (MLPI).

The JPMorgan Alerian MLP Index ETN (AMJ) tracks the investment performance of 50 mid-stream energy master limited partnerships – publicly-traded limited partnerships that invest in the processing, storage and transportation of crude oil, natural gas and natural gas liquid.

As of October 1, 2015, the latest date that JP Morgan has provided a fact sheet for AMJ, the top-10 MLPs that compose AMJ’s underlying index – the Alerian MLP Index – accounted for approximately 66% of that index.

The index’s top holding, Enterprise Products Partners L.P. (NYSE: EPD), is the largest energy transportation and storage company in North America, offering a range of processing, transportation, and storage services. The company’s operations includes natural gas processing, NGL fractionation, petrochemical services and crude oil transportation; including 50,700 miles of pipelines, 14 billion cubic feet of natural gas storage, and 190 million barrels of NGL, refined products, and crude oil storage capacity. The company also owns and operates approximately 125 barges and 60 tow boats.

The underlying index’s second largest holding, Sunoco Logistics Partners L.P. (NYSE: SXL), owns and operates a logistics business consisting of a geographically diverse portfolio of complementary crude oil, refined products, and natural gas liquids pipeline.

Liquefied Natural Gas (LNG) CompanyOther holdings in the index include companies that operate coal mines, store propane, produce natural gas, and own natural gas storage facilities.

Another one of their holdings is Calumet Specialty Products Partners L.P, which processes crude oil into lubricating oils, solvents, waxes, and other petroleum products. The company then sells to industrial customers, who then use the products to manufacture automotive, consumer, and industrial goods. The company also produces asphalt.

AMJ pays a variable quarterly coupon linked to the cash distributions paid on the MLPs in the index, less accrued tracking fees of approximately 0.85% per year.

The UBS E-TRACS Alerian MLP Infrastructure Index ETN is similar to the JP Morgan Alerian MLP Index ETN, with the fund tracking the same top-10 holdings of the index that AMJ tracks. However, MLPI is more concentrated than AMJ, with its underlying index, the Alerian MLP infrastructure index, composed of 25 energy-infrastructure MLPs.

As of January 27, 2016, the top-10 index components tracked by MLPI accounted for approximately 67% of the master limited partnerships that it tracks.

Like AMJ, MLPI pays a quarterly coupon linked to the cash distributions paid on the MLPs in the ETN’s underlying index, the Alerian MLP Infrastructure Index.

Saudi-Arabia-is-trying-to-mainWith my research indicating that crude oil prices are in the process of bottoming, and both AMJ and MLPI paying an annualized yield of 9.42% as of January 27, I encourage those of you who are seeking reliable, regular income from your investments to allocate a portion of your assets to each of those ETNs.

Note: Unlike investing directly into MLPs, AMJ and MLPI do not require investors to file a form K-1 with the IRS. ETN investors report the coupon interest that they receive as ordinary income on IRS Form 1099.

For information on other relatively safe, yet high-yielding, fixed-income securities, I encourage you to try my Free Weekly Market Commentary. Click here to subscribe to that weekly report.

Until next time,

David Frazier

David Frazier is President and Chief Market Strategist of Frazier & Mayer Research, LLC, an independent investment research firm that offers customized research and analytical services to registered investment advisors, hedge funds and high net-worth individual investors. You can check out his latest insights at:

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