A Natural Gas ETF to Play Contango
The JPMorgan Alerian MLP Index ETN (AMJ)(AMJ) offers investors exchange traded exposure to the natural gas marketplace without the problems of United States Natural Gas(UNG).
Although AMJ is less of a “pure play” on natural gas prices than UNG or even First Trust ISE-Revere Natural Gas(FCG), it’s much more predictable over the long term.
AMJ’s investors gain access to the natural gas market through the stocks of companies that store and transport natural gas, many of which are structured as Master Limited Partnerships. While this exchange traded product comes with the risks of exchange traded notes, it is large and liquid, allowing investors to trade in and out of the fund with relative ease.
The companies that AMJ tracks are well diversified businesses involved in natural gas pipeline and storage. According to the fund’s fact sheet, the top five holdings in the fund are Kinder Morgan Energy Partners(KMP), Enterprise Products Partners(EPD), Plains All American Pipeline(PAA), Energy Transfer Partners(ETP)and Energy Transfer Equity(ETE).
These firms are a sort of “tax collector” as natural gas passes through the system, taking a toll even when natural gas prices are low. Natural gas is currently in huge supply at low prices. Eventually this price discrepancy, along with cold weather, hurricanes, or other typical drivers, will push consumers toward natural gas.
UNG’s structure aims to track natural gas prices at the risk of contango , while AMJ tracks MLP’s at the risk of issuer J.P. Morgan. AMJ is a collection of debt notes, rather than equity, which exposes the fund to the credit risk of its issuer. AMJ was originally launched by Bear Stearns under the symbol BSR, but changed its symbol when J.P. Morgan took over and relaunched the index on June 2, 2009.
Rather than having to roll futures contracts month to month like UNG, AMJ is designed for investors seeking income. The MLPs that AMJ tracks are designed to pass on earnings to investors through their dividends. AMJ’s quarterly dividend amounted to 43.6 cents in August. This payout is similar to the dividend that BSR paid in the past, setting AMJ up to yield around 7%.
ETNs are structured for savvy investors, because of the added risk. This risk, however, pales in comparison to the problems over at UNG. As UNG fights to survive regulation and expand, it is exposing investors to increasingly risky derivatives. AMJ is much more suitable for conservative investors looking to make income over time.
Another added benefit for AMJ investors is the tax structure of the fund. MLPs pass their income through to investors, which results in a K-1. Since AMJ is an ETN, it issues a 1099, allowing investors to avoid the K-1. Do-it-yourself tax preparers will appreciate the difference between these two forms.
While UNG, FCG and AMJ offer unique perspectives on the natural gas marketplace, UNG tracks spot prices, FCG tracks producers and AMJ tracks MLPs. Of these funds, AMJ is the most appropriate for savvy income investors. The “toll booth” firms that underlie AMJ will continue to pick off the flow of natural gas and continue to be indispensable participants in the energy marketplace.
