One of the biggest stories in the ETF world over the past two years has definitely been the rise of MLP products. The first was JPMorgan Alerian MLP ETN (AMJ) which has seen incredible success and currently has over $5 billion in AUM, and this was shortly followed by a dozen more which drilled down into the segment or provided exposure using an ETF structure instead.
While UBS has the most in the space—with a half dozen in total—several other companies have thrown their hat into the ring as well. One of the newest and by far the cheapest offering comes from Global X and their Global X MLP ETF (MLPA).
This fund only charges investors 45 basis points a year in fees, roughly half the cost that investors see in nearly all the other products in the space. Still, the product remains relatively unpopular despite its discount price tag, as it has amassed under $20 million in assets since its debut roughly eight months ago (read No Dividend Tax Debate for these High Yield ETFs).
Even with this somewhat disappointing launch, the company remains undeterred, looking to expand its lineup even more in the space, as evidenced by a recent SEC filing that called for another MLP ETF. While a great deal of information was not released in the document, such as the ticker symbol or expense ratio, we have highlighted some of the key points from the filing below:
The proposed ETF will look to track the Solactive MLP & Affiliates Index, before fees and expenses. This benchmark looks to track both energy-related MLPs, and MLP affiliates in a single index.
In this case, this means that the fund will focus in on MLPs that engage in the transportation, storage, processing, refining, exploration or production of natural resources. Meanwhile, the MLP affiliates include corporations that own—directly or indirectly—MLP general partner interests.
These general partner interests mean that the corporation in question has an economic interest in an MLP and receive a percentage of the MLP profits over a certain level. Due to this distinction, this could add a new tax wrinkle to the MLP ETF equation (see How to Play the MLP ETF Space).
Depending on the structure, MLP affiliates may be taxed as corporations and thus do not offer up the pass through capabilities that are the hallmark of ‘regular’ MLPs. While this does mean that a K-1 likely won’t be required, it does suggest that double taxation will be an issue, and thus payouts could be lower.
Still, the inclusion of MLP affiliates could open up the space for Global X and allow it to tap into some often overlooked firms that still have great MLP-like exposure. After all, companies that own or operate MLP assets are very likely to be driven by the same factors as their pure MLP cousins, so it is reasonable to expect MLP affiliates to have a similar risk reward profile.
ETFs vs. ETNs
Investors should also note that the number of ETFs in the MLP space is very few at this point, as most have opted for the ETN structure to play the segment. Currently, just four of the 13 are built as ETFs (AMLP being the oldest), as most issuers have opted to avoid the K-1 with the ETN structure despite the traditional lack of popularity that we have seen in the Exchange-Traded Note world (see ETFs vs. ETNs: What’s The Difference?).
Without a full slate of information available, I am left to speculate on how this proposed Global X ETF will fit into the current MLP lineup. I think the confusing tax issues—thanks to the use of both MLPs and MLP affiliates—will definitely need to be straightened out before investors will ever embrace the fund.
If they can do that—as well as keep expenses low—while still offering up a new type of exposure to the crowded space, Global X could see some decent inflows from investors seeking a new type of play in the MLP ETF world.
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