The ETF Mad Scientists’ Latest Innovation: AJM

Balloon boy has focused the world’s attention on home brewed mad scientist types trying to get famous while solving the mysteries of time, space and the world in general. The Balloon Boy’s hoaxer is clearly obsessed with fame, the creativity and shear bravado is to be admired. Creativity is the driving force of all innovation. The financial market has its own creative types working on new products all the time. Some are successful, some flop but the urge to create remains strong.

The ETF world is full of financial mad scientists cooking up new and different ways to package underlying securities into easily tradable forms. If there is a commodity, index or financial product, you can rest assured that someone somewhere is crunching numbers and running code to build an ETF or ETN around it. One of these latest financial innovations is JP Morgan’s MLP Alerian Index ETN
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. These exchange traded notes track the underlying Master Limited Partnership Alerian Index. What?

That was my first impression. Sounds like some kind of third world new stock exchange or something?! This is totally wrong. Master Limited Partnerships are limited partnerships that are publicly traded on U.S. security exchanges. Most MLP’s operate in the energy infrastructure field meaning pipelines that transport crude oil and natural gas. They earn their returns by fees and not the actual prices of the commodity transported.

AMJ chart

The Alerian Index is a market cap weighted, float adjusted index that provides a benchmark to track the MLP sector. AJM was first launched in April 2009. They pay out a quarterly coupon based on the cash distribution fewer fees and the coupons are taxed as ordinary income on a 1099 form.

As you can see, price has been in a nice uptrend since launch in April. However, the very low volume of this new product could cause some liquidity concerns. If you are interested in the MLP sector and could use the tax advantages provided, this is one ETN worth a closer look.

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.