Reader Mailbag: AMLP Is Not The Best Energy Stock!
Reader Mailbag: AMLP Is Not The Best Energy Stock!
Last Friday’s article on the best energy stock to buy for a rebound in crude hit a nerve with readers. As you may remember, we discussed three oil and gas ETFs to capitalize on an eventual rebound in the price of crude.
I included the Energy Select Sector SPDR (XLE), SPDR S&P Oil and Gas Exploration and Production ETF (XOP), and the Alerian MLP ETF (AMLP).
The ETFs above will see substantial price appreciation when crude oil rebounds- something I expect to happen later this year.
But some readers weren’t happy with my list, specifically the inclusion of the AMLP…
Here’s what they had to say…
“Justin, is the operating expense of the AMLP really 8.50% annually? That seems outrageous…” – Charles B.
Marty K. chimed in with…
“How can you seriously make the recommendation for the ETF AMLP when it has such an outrageous expense ratio?”
First of all, let me thank you both for writing in. I enjoy reader feedback and do all I can to respond to legitimate questions and concerns.
It turns out your concerns with AMLP are indeed valid.
Let me explain…
Expense Ratios Explained
My intention with last Friday’s article was to present simple and relatively safe ways to capitalize on the looming energy rebound.
Since XLE, XOP, and AMLP hold baskets of companies involved in various aspects of the energy industry, investors achieve instant diversification- something I feel is essential with the current oil pricing environment.
When recommending XLE, XOP, and AMLP, the expense ratio of each fund was not a part of my search criteria. As you’ll see in a second, that was an oversight on my part.
Now, let’s back up a second…
What’s an expense ratio?
In case you’re unaware, it’s an annual fee ETF operators charge investors to run the fund. The expense ratio is expressed as a percentage of the fund’s assets.
For example, XLE has an expense ratio of 0.15%.
In other words, for every $1,000 of XLE an investor buys, $1.50 in annual fees are collected by the fund to cover administrative costs, advisory fees, and other operating expenses.
That’s a pretty darn good deal if you ask me.
What about XOP?
The small- and mid-cap oil and gas exploration ETF carries an expense ratio of 0.35%. That’s $3.50 in annual fees for every $1,000 invested- still a reasonable charge for the diversification and simplicity XOP provides to investors.
But there’s a big problem with AMLP…
The pipeline MLP ETF carries a whopping 8.5% expense ratio. That’s an eye popping $85 in annual fees for every $1,000 invested!
While the majority of AMLP’s expense ratio is made up of deferred income tax expense, it’s still an onerous rate. After all, the average expense ratio is 0.43% for the entire ETF industry, and around 0.80% for the pipeline MLP ETF/ETN industry.
Thankfully, there are some good alternatives to AMLP. And these pipeline MLP ETF/ETN substitutes don’t charge an arm and a leg in fees.
Let’s get to it…
Energy Income: MLP ETF/ETN Alternatives
Believe it or not, despite the hefty expense ratio, AMLP is the largest MLP ETF on the market with over $9 billion in net assets. I guess there are plenty of other investors out there who don’t realize how much the ETF is charging in annual fees!
Here are some better alternatives…
- JP Morgan Alerian MLP ETN (AMJ)- 5.2% dividend with a 0.85% expense ratio.
- UBS E Tracs Alerian MLP ETN (MLPI)- 4.8% dividend with a 0.85% expense ratio.
- Credit Suisse Equal Weight MLP ETN (MLPN)- 4.3% dividend with 0.85% expense ratio.
- Direxion Zacks MLP High Income ETF (ZMLP)- 8.55% dividend with 0.65% expense ratio.
- Morgan Stanley Cushing MLP High Income Index ETN (MLPY)- 7.35% dividend with 0.85% expense ratio.
While the list above is not all inclusive, it does include the pipeline MLP ETF/ ETNs producing the highest dividend yield and lowest expense ratio.
Remember, the oil and gas pipeline industry has been hit hard the past six months. That’s why you’ll find many of the assets above are trading near 52-week lows. However, I believe the current downturn is an exceptional buying opportunity in an industry with a bright future.
And the best part is, you’ll be paid to wait for an eventual rebound in crude.
Now, it’s very important to note that 4 out of the 5 assets above are ETNs, not ETFs.
What’s the difference?
That’s a subject we’ll discuss in depth on Friday!
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Energy, Natural Resource Stocks
