What you need to know about investing in the Alerian MLP Index (Part 1 of 6)

An introduction to the Alerian MLP Infrastructure Index

By Magnus Tchekhov Nov 13, 2014 10:40 am EDT

The energy industry has been in a volatile spell for some time now. Energy prices, particularly crude, have seen a more than 25% slump since their peak in June this year. During this slump, energy companies too saw heavy losses comparable to that of crudes. However, one subsector of the industry stood out for its better performance, energy MLPs.

MLPs (or master limited partnerships) are special legal entities that pass on most of their profits to investors without having to pay taxes, provided that these profits are derived from particular businesses like energy infrastructure, and that the investors pay these taxes at the individual level. For a better understanding of this investment instrument, check out our primer on MLP basics here .

The Alerian MLP Infrastructure Index (AMZI)

Before we explore why this sector did relatively well in the next part, let’s first get to know the most important benchmark of the sector, AMZI.

AMZI is an index that consists of the top

25 American energy infrastructure MLPs, which primarily engage in the business of energy commodity transport and processing.

Each quarter the proportions of the index’s holdings are adjusted based on factors like the companies’ market capitalization, the number of units traded publicly, and a maximum that any one company can represent in the index.

As of its September rebalancing exercise, AMZI’s biggest holding is MLP giant Enterprise Products Partners LP (EPD ) at

9.6%, closely followed by Kinder Morgan Energy Partners LP (KMP ) at

9.2%, and Energy Transfer Partners LP (ETP ) taking up

7.5%. So, these three companies alone represent over a quarter of the index.

AMZI tracks the price only performance of its constituents, while its more relevant sibling, the AMZIX, has the same name, but more accurately also includes the distributions from its constituents for return calculations—called a total return (or, TR) index.

In this series, we’ll analyze the performance of these indices, and try to compare two ways to invest in the index, or the basket of MLPs that comprise the index: the Alerian MLP ETF (AMLP ) and the UBS ETRACS Alerian MLP Infrastructure Index ETN (MLPI ).