ETFs for Big Natural Gas Deal

At the start of the week, investors were greeted to news of a landmark M&A transaction in the natural gas pipeline and storage industry. As the overall impact of this deal gains clarity, ETF investors can position themselves to benefit.

Kinder Morgan's(KMI) decision to acquire El Paso(EP) is notable for a number of reasons. First, the deal, valued at $38 billion, marks the largest pipeline takeover in history.

In addition, the marriage of these two massive gas transportation firms represents another notable example of the consolidation that has been taking place in the natural gas realm. In recent years we have watched as large, integrated oil companies like Exxon Mobil(XOM) and ConocoPhillips(COP) have increased their reach into natural gas industry. With these energy titans stepping in and absorbing smaller industry players, it is possible that the resulting decrease in competition will help to boost natural gas prices over time.

Prior to the deal, El Paso and Kinder Morgan reigned as the largest and second largest natural gas pipeline operators in North America, respectively. The combined company, boasting approximately 80,000 miles of pipelines, will become both the largest midstream enterprise and fourth largest energy company in North America.

It can be tricky for ETF investors to gain direct access to Kinder Morgan and El Paso. However, through their respective master-limited partnerships, Kinder Morgan Energy Partners(KMP) and El Paso Pipeline Partners(EPB), it is possible to take advantage of the milestone deal. Together, this pair of MLPs represents a combined 12% of the JPMorgan Alerian MLP Index ETN(AMJ).

In recent ! years, m aster limited partnerships have risen in popularity among those looking to target the energy sector, as well as investors seeking attractive yields. KMP, for example, provides investors with a 6.4% distribution. The payout enjoyed by EPB investors, meanwhile, stands at 5.1%.

These attractive payouts are not without a tradeoff, however. As many have pointed out in the past, investors with exposure to master-limited partnerships can face headaches when tax season rolls around.

Rather than being taxed at a company level, the tax liability generated by from the partnership is passed on to the individual shareholder. Whereas investors holding traditional securities receive a Form 1099 at tax time, an investor holding MLPs like KMP or EPB in their portfolios will be presented with a K-1.

AMJ can help alleviate these tax-related headaches. As an exchange traded note, the product does not provide investors with direct exposure to the individual components comprising the Alerian MLP Index. Rather, the product is a senior, unsecured debt note issued by JPMorgan(JPM) designed to reflect the performance of the benchmark. This structure allows the income generated while holding AMJ to be taxed using a traditional Form 1099.

AMJ is an attractive option for investors looking to gain exposure to the companies involved in this massive pipeline acquisition. Given the influence that this deal and others down the road may have on the broad natural gas industry, however, investors may also want to put a fund like the First Trust ISE Revere Natural Gas Index Fund(FCG) on the radar.

FCG is a traditional ETF designed to provide investors with exposure to top natural gas producers from across the U.S. and the rest of the globe. Reflecting the increasing presence of integrated energy giants within this sector, the fund's index includes a combinatio! n of sma ll, independent producers and large names like Exxon, Royal Dutch Shell(RDS.A) (RDS.A), and ConocoPhillips.

The joining of Kinder Morgan and El Paso is the most recent example of the evolution taking place within the natural gas industry. Both AMJ and FCG are examples of tools investors can use to ride this wave of change.