The master limited partnership (MLP) space is gradually becoming one of the preferred investing areas. Since last year, the market has seen a flurry of launches in this space, which despite being rate-sensitive, saw interesting investing trends in 2013. MLPs surged this year with all exchange-traded products delivering positive returns so far (read: Latest MLP ETF Competitor: Barclays Rolls Out OSMS).
Securities in this segment are all the rage due to their structure which upholds big yields, and an exposure to lower risk segments like energy transportation or infrastructure. Probably to cash in on the trend, Royal Bank of Canada introduced an exchange-traded note on July 29. The note trades in the name of a Royal Bank of Canada Exchange Traded Note with a ticker symbol of YGRO.
YGRO in Focus
This ETN looks to track the Yorkville MLP Distribution Growth Leaders Liquid PR Index which is a benchmark of midstream energy master limited partnerships. The key motive of the index is maximizing distribution growth by following 25 MLPs (read: Boost Income and Growth with MLP ETFs).
From the industrial point of view, the index is dominated by crude oil pipelines which account for roughly 24% of assets. General partners and gathering/processing take the next two positions at around 15% of exposure. Natural gas pipelines get the least exposure of about 5% at the index.
Companies in the index receive an equal-weighted exposure with Hi-Crush Partners, Rose Rock Midstream LP and Atlas Energy LP accounting for about 6.7%, 5.7% and 5.5% of total assets. The top 10 holdings account for about 54.3% of the total assets.
How Does it Fit in a Portfolio?
This ETN could be an intriguing option for investors seeking broad exposure to the MLP space with a focus on income and growth. As the index pays a lot of attention to distribution growth rates, the product has been designed as an income generating investment vehicle for yield-hungry investors.
The Yorkville MLP Universe currently has a yield of 5.2% and year-over-year distribution growth of 7.3%. Now that the broader market is reeling under geo-political concerns and uneven economic growth, search for yields has become prevalent among investors (read: 2 Rising ETFs With Double-Digit Yields).
Moreover, though MLPs perform better in a low interest rate environment, a possible hike in interest rates next year will not completely mar the sector’s appeal. The reason behind this is higher activity.
As per the index provider, the U.S. stood out as a huge energy producer last year with about 25 million barrels of oil equivalent every day. This indicates a 40% increase in output from 2008. The nation remains steadfast in becoming energy independent over the long haul and is thus investing more in activities and energy infrastructure which will in turn help the space to stay afloat in a shaky market.
Can it Succeed?
There are quite a few exchange-traded products already present in the MLP space, so it could be difficult for YGRO to build up assets. This is particularly true if investors consider the level of popularity that is seen in Yorkville High Income MLP ETF (YMLP) and Yorkville High Income Infrastructure MLP ETF (YMLI), as both these high-yielding products are far behind the top-notch products in terms of assets under management (read: Yorkville Debuts High Income Infrastructure MLP ETF).
The space is presently topped by Alerian MLP ETF (AMLP) which has amassed about $9 billion of assets. Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure Index (MLPI) are the next two position holders with a respective $6.46 billion and $2.12 billion of assets.
Compared to this set, YMLP and YMLI have just managed to garner, respectively, $321.8 million and $40.9 million in assets so far. So, to win the game, the newly launched product needs to capitalize on its high-yield nature which is presently in vogue among investors.
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- Royal Bank of Canada