The year so far has been pretty comfortable for interest-rate sensitive sectors like Master Limited Partnerships (MLPs), thanks to the Fed’s continuous assertion of keeping rates at rock bottom levels. The Fed has made it very clear to investors that the “Taper” and “Interest Rate Hike” do not necessarily go hand in hand and that it is not going to increase rates at least this year.
Taking a cue from this, issuers are targeting this space with new product launches, giving investors more and more choices in the MLP world. While traditionally the space is being ruled by ETFs/ETNs focusing on the energy industry, issuers are exploring ways to give investors exposure to non-energy MLPs as well.
The latest non-energy product to hit the market comes from ETRACS in ETN form. The product – ETRACS Wells Fargo MLP Ex-Energy ETN – trades under the ticker FMLP and has commenced trading from June 10 (read How to Play the MLP ETF Space).
FMLP in Focus
The ETN looks to track the Wells Fargo MLP Ex-Energy Index. The index follows a modified market cap weighting methodology and looks to track the performance of listed non-energy MLPs that meet certain criteria.
The companies included in the index receive partnership taxation treatment and derive the majority of their income from non-energy related activities.
The index holds a small basket of 18 stocks, within which a total of eight stocks have more than 9% allocation in the fund, suggesting some concentration risk. KKR & Co LP, Blackstone Group LP and Icahn Enterprises LP are the top three holdings of the index.
The fund seeks to pay variable monthly coupons linked to the cash distributions on the Index constituents, less fees. The product looks to charge investors 85 basis points a year in fees, at par with other products in its space (read: 3 Excellent Dividend ETFs for Growth and Income).
How does it fit in a portfolio?
The product is an interesting choice for investors looking for high levels of income in the current rock bottom interest rate environment. Also, the ETN can be a suitable bet for investors looking to try their hands in MLP ETFs/ETNs outside the traditional energy sectors.
Further, MLPs have exhibited low correlations with asset classes, including equities and commodities, and are thus expected to add diversification benefits to a portfolio (read: Boost Income and Growth with MLP ETFs).
Investors should, however, keep in mind that since the new product is an ETN, the product carries credit risk. Moreover, with the index being created just a few weeks ago, we have little track record of the index’s past performance and any clues about its performance in the future.
The MLP space has quite a number of products with Alerian MLP ETF (AMLP) in the lead, followed by Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure Index (MLPI). While AMLP manages an asset size of $8.9 billion, AMJ and MLPI have amassed $6.3 billion and $2 billion respectively (see all the MLP ETFs here).
AMLP being the largest fund sees a good volume of more than three million shares a day, though the other two products also have decent liquidity. However, including the above three, all the MLP ETFs primararily focus on energy commodities such as natural gas, crude oil, and refined products.
Thus the newly launched product might have an edge and attract decent inflows, considering its focus on non-energy products. In fact, the note has already attracted a little less than $25 million after just two days in the market, so clearly there is a lot more room for this fund to expand the asset base.
However, over the long run only decent performance on a total return basis (price plus yield) can make this fund more popular than the others in this crowded space.
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