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New energy infrastructure index, fund seek to challenge MLP benchmark Alerian

A new index and electronically traded fund tracking U.S. and Canadian energy infrastructure are looking to upstage the energy transportation bellwether Alerian with a broader focus and lower-cost fund structure.

Launched by the investment advisory firm SL Advisors LLC on Oct. 30, the American Energy Independence Index includes master limited partnerships and general partners of MLPs. Unlike the Alerian Master Limited Partnership Index, which focuses on MLPs, the exchange-traded fund based on the index avoids federal corporate income taxes by maintaining its MLP holdings below 25% of the entire portfolio. The passively managed American Energy Independence fund has a 0.75% expense ratio, according to its prospectus, compared to 1.42% listed for the Alerian MLP ETF.

"We've got a better product for less money. ... [The Alerian] is structurally flawed and expensive," SL Advisors LLC Managing Partner Simon Lack said in an interview. "The [Alerian MLP ETF] was created when [energy infrastructure] was mostly an MLP business, and I think that time has passed."

The American Energy Independence Index, Lack continued, reflects the midstream energy sector's evolution as more partnerships convert to C corporations, while the remaining MLPs moderate distribution growth and eliminate the incentive distributions that are due to their general partners. "A lot of companies have been redirecting cash from distributions to reinvest back in the business," he said. "The Alerian is increasingly missing what's going on."

The new index's top constituents includes U.S. LNG export pioneer Cheniere Energy Inc. and companies that have rolled up their MLPs like Kinder Morgan Inc. and ONEOK Inc., as well as MLP general partners such as Energy Transfer Equity LP and Plains GP Holdings LP.

The fund, listed under the symbol USAI, has yet to see significant volumes traded, while the Alerian MLP typically logs millions of shares of activity per day.

CBRE Clarion Securities equity analyst Hinds Howard agreed with the fund's premise that MLP-only ETFs have outlived their use. "I generally believe that the midstream sector has evolved to a point where a pure MLP fund product makes little sense," he said in an interview.

The Alerian index was launched in 2006, a time of booming oil and natural gas pipeline development that backstopped partnerships' relatively high distribution yields, even though the potential for volatile cash flows and stock prices remained. The index generated a steady total return up until the 2014 commodity price crash and still suffers losses as the energy industry continues to recover from that crisis. As of Dec. 15, the Alerian had dropped 7.4% since the end of 2016 on a total-return basis, including reinvestment of distributions.

Alerian representatives could not immediately be reached for comment.