Although equities have had a strong run so far this year, oil
prices have not kept up the pace. Crude oil remains stubbornly
around the low to mid $90/bbl level in WTI terms, and shows no sign
of breaking out in the near future thanks to a strong dollar.
While this situation certainly had a negative impact on
commodity investments, it hasn’t been terrible news for the MLP ETF
space (read: Time to Sell This Commodity ETF?). MLP ETFs have had
an excellent start this year and led the way higher in the
traditional energy space, encouraging many investors to consider
this often overlooked asset class.
What are MLPs?
MLPs, or Master Limited Partnerships, are publically traded
partnerships that are generally engaged in the transportation,
storage, production, or mining of minerals and natural
resources.
They are relative safe and less risky than other plays in the
broader energy space.
This safety stems from the ‘toll way’ models of these
businesses, as MLPs often operate pipelines or similar energy
assets that ferry oil, natural gas, and other products across the
landscape. The firms in this space are not affected by the changes
in oil and natural gas prices, thereby having stable revenues
(read: 3 Commodity ETFs Still Going Higher).
Beyond this stability, yields are also pretty high thanks to
some favorable tax rules—like what you see in the REIT space-- that
push firms in the MLP space to pay out substantially all of their
income to investors on a regular basis. This results in more than
90% of income going out to partners in order to avoid the issue of
corporate taxation.
In addition to high yield and the potential for capital
appreciation, MLPs also have lower volatility and provide
diversification benefits to the portfolio (read: 3 Excellent ETFs
for Income Investors).
MLP ETFs/ETNs in Focus
MLP ETFs and ETNs have been extremely popular in recent years
thanks to increased interest in energy investing and a high payout
potential. A host of new products have been introduced in the space
this year such as Barclays ETN+ Select MLP ETN (ATMP), Yorkville
High Income Infrastructure MLP ETF (YMLI), Global X Junior MLP ETF
(MLPJ) and iPath S&P MLP ETN (IMLP), nearly all of which have
seen tremendous inflows in the short time these have been on the
market.
This is because investors continue to pour assets into a segment
that promises solid income potential at a time when many bond
yields look paltry and bond prices look stretched (read: Time for
Inverse Bond ETFs?).
Yet, unfortunately, there are still some tax headaches when
using the MLP structure, namely the possible need for a K-1 form at
tax time. However, there could be a way to avoid this issue by
looking to MLPs that use an exchange-traded structure. While some
MLP ETFs still face the K-1 issue at tax time, those that utilize
an ETN structure will not.
ETNs do not actually hold the securities of an underlying index.
Instead, an ETN is an unsubordinated debt security that promises to
pay out a return that is equal to an index. This is completely
unlike an ETF which buys and sells the securities that make up a
particular benchmark.
Due to this advantage, investors can buy MLPs without the hassle
of K-1s at tax time, making MLP ETNs an excellent choice for those
looking for exposure to the high yield segment without the taxation
headaches (read: No Dividend Tax Debate for these High Yield
ETFs).
For these investors, we have highlighted a handful of MLP ETNs
below, any of which could make for quality picks that still avoid
some of the key issues that plague not only general MLP
investments, but MLP ETFs as well:
JPMorgan Alerian MLP Index ETN
(AMJ)
Launched in April 2009, this is by far the most popular and the
largest ETN in the MLP space with AUM of roughly $5.7 billion and
average daily volume of more than 1.3 million shares.
With holdings of 50 securities, the product provides exposure to
midstream energy MLPs and tracks the Alerian MLP Index. The note
puts more than 60% in the top 10 holdings, suggesting heavy
concentration across individuals (see more in the Zacks ETF
Center).
Enterprise Products Partners takes the top spot with 15.46%
share alone, while the next two spots – Kinder Morgan Energy
Partners and Plains All American Pipeline – together make up for
16.27% of the assets. From a market cap look, large caps account
for 55%, while mid caps (27%) and small/micro (18%) also receive
decent allocations.
The ETN charges investors 85 basis points a year in fees for its
services and is one of the strong performers in the MLP space. AMJ
gained about 18.7% year-to-date and its yield comes in at a robust
3.43%, suggesting that it could be a decent source of yield (read:
Two Unconventional Sources of ETF Yield).
Morgan Stanley Cushing MLP High Income Index ETN
(MLPY)
Although this note suffers from low volume – and thus wide bid
ask spreads – it could be an interesting yield destination for
those looking for more exposure to the MLP space. The product
tracks the Cushing MLP High Income Index, holdings 30 energy and
shipping focused firms based in North America.
Exposure is well diversified across the group, as no single
company makes up more than 5.5% of the assets. VR Partners, Energy
Transfer Partners and Buckeye Partners occupy the top three
positions in the basket. Still, investors should note that this is
a small cap centric product with roughly half of the assets going
to this cap level.
This product results in an excellent yield of over 6.9%, while
fees are like other MLP ETNs at 85 basis points a year (read: 3 Red
Hot Dividend ETFs). With AUM of just $21.5 million, MLPY is another
solid performer in the space this year, surging 11.1%
year-to-date.
UBS ETRACS Alerian Natural Gas MLP Index ETN
(MLPG)
For focus on the natural gas corner of the MLP world, investors
have MLPG, a relatively less popular note from UBS. The product has
amassed only $30 million in AUM and trades in small volumes
resulting in increased cost in the form of a wide bid/ask
spread.
The note seeks to match the performance of the Alerian Natural
Gas MLP Index and pays a variable quarterly coupon, net of fees and
expenses. This benchmark consists of firms that generally earn the
majority of their cash flow from the transportation, storage, and
processing of natural gas and natural gas liquids and comprises 20
stocks in total (read: Natural Gas ETFs Soaring in 2013).
Investors should note that mid cap securities consist of half of
the portfolio, with small caps (35%) comprising much of the rest.
In terms of individual holdings, the product is equally
concentrated across its individual securities. Access Midstream
Partners, Atlas Pipeline Partners and Boardwalk Pipeline Partners
take the top three spots in the basket.
Fees for this note also come in at 85 basis points a year,
although the yield is rather robust at roughly 5.28% per annum. The
ETN added 13.7% so far in the year, putting it in the middle of
road on this list.
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JPM-ALERN MLP (AMJ): ETF Research Reports
BARCLY-SLCT MLP (ATMP): ETF Research Reports
IPATH-SP MLP (IMLP): ETF Research Reports
E-TRC UBS AL NG (MLPG): ETF Research Reports
GLBL-X JR MLP (MLPJ): ETF Research Reports
MS-CUSH MLP HI (MLPY): ETF Research Reports
YORKVL-HI IN ML (YMLI): ETF Research Reports
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