mlp etf master limited partnership etf mlp management alerian mlp etf – Alerian MLP (DOC) by jimknight


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									mlp etf, master limited partnership etf, mlp management, alerian mlp etf – Alerian MLP

Author : Jim Knight

The Alerian MLP ETF (NYSE: AMLP) delivers exposure to the Alerian MLP Infrastructure Index (AMZI), giving investors a
means of tracking the overall performance of the United States energy infrastructure Master Limited Partnership asset

                                                                                             Address :
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                                                                                             ALPS ETF
                                                                                             P.O. Box 1107
                                                                                             Denver, CO 80201
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                                           How Stock Indexes Work

If there’s one thing that captures the mood of a nation, it’s the stock market index. When the Dow
Jones Industrial Average (“Dow Jones”) or Standard & Poor’s 500 (“S&P 500”) falls, the collective
mood of the nation goes down; when it rises, national mood rises with it.

What makes stock market indexes so important?

Stock market indexes are used to measure the performance of the stock markets, and in this way
are indicators of the economic health of the nation. They can be used as benchmarks for
comparing the performances of individual stocks or even portfolios, both of individuals and entities
like mutual funds.

How do stock market indexes work?

Stock market indexes consider some select stocks in the markets when coming up with a
consolidated value, and the basis of this selection can be size, industry, etc. There are two major
ways in which this value is calculated – price weighing and value weighing. This gives rise to the
two main types of indexes – price weighted index and value weighted index, of which Dow Jones
and the S&P 500 are prime examples, respectively.

In an index, each of the constituent stocks contributes a percentage of the total value. This is its
weight in the index. In a price-weighted index, the price of the stock is the only determinant of
this weight. Therefore, a highly-priced stock of a small company can have a larger weight than a
lower-priced stock of a large company. In such a situation, price movement of even a single stock
will heavily influence the value of the index even though the dollar shift is less significant.

For a value weighted index, it is the market value of all the stock or its market capitalization that
determines its weight. Thus, a relatively small shift in the stock price of a large company will
heavily influence the value of the index.

While traditional value weighted indexes have considered all outstanding shares when determining
market value, some of the recent ones consider only the floating shares, that is, the shares in the
hands of public investors as opposed to company officers, directors, or controlling-interest
investors. The reason behind this distinction is that only floating shares are available for trading,
and such an index may be more representative from the individual investor’s point of view.
Which are the popular stock market indexes?

The most popular stock market indexes in the US are:

* Dow Jones – Price weighted index of 30 stocks which are the largest representatives from
different industries in the New York Stock Exchange and NASDAQ exchange.

* S&P 500 – Value weighted index of the 500 stocks with the highest market capitalizations in the
New York Stock Exchange and NASDAQ exchange.

* NASDAQ Composite – Value weighted index of more than 5000 stocks on the NASDAQ
exchange. Since non-US stocks are also listed in NASDAQ, this index is not exclusively a US stock
market index.

These are only a few of the hundreds of indexes available worldwide, tens of them in the US itself.
Some of the famous global ones are Hong Kong’s Hang Seng, Tokyo’s Nikkei, London’s FTSE 100
and Mumbai’s Sensex.

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                        The History of the Master Limited Partnership

In recent times, Master Limited Partnerships or MLPs have started to gain popularity owing to
their steady returns, even during recessionary times. Even as the stock markets tanked in the
wake of the sub-prime mortgage crisis, MLPs continued to deliver healthy returns. This is owing to
the commodity nature of their business, dealing primarily with oil and gas and not subject to
short-term variations. In other words, even during times of recession, people will buy gas and
that ensures MLPs will deliver returns. And then there are the tax incentives.

Before embarking on the history of the Master Limited Partnership, let’s first define what it is. As
its name suggests, it is a limited partnership. It combines the tax benefits of a limited partnership
with the liquidity value of the tradable stock. In order to qualify for an enterprise to issue Master
Limited Partnerships it needs to earn 90% of its profits through activities related to natural
resources, real estate or commodities.

The first MLP to be launched was one by the Apache Oil Company in 1981. Its purpose was to tap
smaller investors for capital while allowing them to become partners. This was soon followed by
other oil and gas companies following suit, with real estate companies joining in as well.
Legislators became concerned with the meteoric rise in MLPs, with restaurants, hotels,
amusement parks and even the Boston Celtics going down this route in order to save on corporate

As a result, new tax laws were formulated. The Tax Reform Act of 1986 and Revenue Act of 1987
put in place restrictions that effectively eliminated preferential tax treatment for all MLPs except
those with 90% of their incomes derived from various “natural resource” activities, such as oil and
gas exploration, production, transportation, and so on.

Consequently, many of the earlier MLPs ceased to exist, transforming themselves back to
corporations. As of today, there are around 55 MLPs trading on American markets. Most of them
deal with midstream energy distribution, transportation, and terminal assets. Some of the newer
ones deal with industrial source carbon dioxide (include in the tax code in 2008), and the
transportation and storage of ethanol, biodiesel and other alternative fuels (also added in 2008).
Like the S&P 500 and Dow Jones Industrial Average that track stock performance, MLP
performances are tracked by the Alerian MLP index or AMZ. Alerian was founded in 2004 by
Gabriel Hammond as an MLP asset manager. The AMZ was born on June 6, 2006, when JP Morgan
formally announced its operation. The index is distributed everyday through ticker AMZX and is
present on Alerian’s website. In addition, S&P calculates 10 years of historical index data on both
a charge and total return basis.

Some of the larger MLPs, by market capitalization, are Enterprise Product Partners (Ticker: EPD),
Kinder Morgan Energy Partners (KMP), Williams Partners (WPZ), Energy Transfer Partners (ETP)
and Plains All American Pipeline (PAA). The last year has also seen the launch of MLP mutual
funds that have further opened up this sector.

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