First Trust, the Illinois-based ETF issuer best known for its lineup of AlphaDEX funds, has debuted another new product, its first since the wave of country funds the company launched in mid-February. However, while those February launches focused in on individual nations, this latest release looks to hone in on the MLP market instead with the North American Energy Infrastructure Fund (EMLP).
This new product propels First Trust into the incredibly competitive—but also popular—MLP world following a host of other issuers that have already seen great success in this growing slice of the market. Currently there are already 10 other products in the space with over $8 billion in AUM already under management (see Ten Biggest U.S. Equity Market ETFs).
While the segment may be a tough fight for new issuers, First Trust may see some success thanks to its relatively novel approach to the space in EMLP. The product is not only actively managed, but has a focus on current distributions as well. As such, the product could be an interesting pick for investors looking for high yielding securities during this low rate environment.
This looks to be done by honing in on firms that are in the energy infrastructure sector including MLPs, limited liability firms taxed as partnerships, Canadian income equities, pipelines and utilities. It also includes firms that derive at least half of their revenues from operating or providing services in support of infrastructure assets ranging from pipelines to power transmission and hydrocarbon storage (Read Oil Bull Market Is No Place For MLP ETF Investors).
This active process is achieved via multiple steps in order to only get the 50 top companies in the segment for inclusion in the final fund. The first step consists of the managers looking for monopoly-like businesses that operate in non-cyclical segments that can easily pass on costs to end users.
Then, after identifying these firms, managers look at high dividend payers that have a good management track record and quality financial metrics. Once this is determined, position sizes are calibrated by looking at expected IRR and risk factors, giving the biggest weights to companies that have the most favorable metrics in this regard (Five ETFs to Buy in 2012).
With this methodology, the fund has a diverse set of holdings with no one security comprising more than 8% of assets, although the complex process does result in somewhat-high fees of 95 basis points a year. In terms of top holdings, Enbridge Energy Management (EEQ) and Kinder Morgan Management (KMR) take the top two spots while TransCanada, Williams Companies, and Dominion Resources round out the top five.
As we touched upon before, the MLP exchange-traded market is growing increasingly intense and is already populated by a number of other issuers. Seemingly, the biggest competitors are likely to be the Alerian MLP ETF (AMLP) and the Yorkville High Income MLP ETF (YMLP).
AMLP is already a massive $3 billion fund that trades more than 1.5 million shares a day suggesting impressive levels of liquidity and tight bid ask spreads. Furthermore, the product costs 10 basis points less than EMLP although it does hold about half as many securities.
Beyond this fund, there is also the recently launched YMLP to consider as well. The ETF has just $38 million in AUM but is a recent entrant in the market and hasn’t had a great deal of time to build up assets. This product also charges less than EMLP but holds half as many holdings as well. However, investors should note that this fund also has a focus on high yield securities and thus looks to be a big competitor to First Trust’s new fund (read Yorkville Files For Two More MLP ETFs).
Overall, it appears as though First Trust will have its hands full in terms of obtaining assets for its new fund. Not only is it the most expensive fund in the MLP space but it is a late comer to an already crowded party.
However, with the focus on high yield and the relatively well spread out portfolio, First Trust could see some inflows, especially if the active management can produce alpha. Either way, it looks to be an interesting path ahead for EMLP to see if it can use its high yield to overcome many of its more established—and cheaper—counterparts in the MLP ETF world.
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