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ETRACS Launches Leveraged MLP ETN - MLPV - ETF News And Commentary

Zacks Equity Research

ETRACS, the ETF brand from the Switzerland-based bank UBS, which has roughly three dozen products listed in the U.S. market has recently launched another product targeting the MLP space. The new product – ETRACS 2xMonthly Leveraged S&P MLP INDEX ETN – trades under the ticker MLPV and charges 95 basis points as fees.

MLPV in Focus

The newly launched product provides monthly compounded 2x leveraged exposure to the S&P MLP Index. The index provides exposure to master limited partnerships (MLPs) and publicly traded limited liability companies that are primarily engaged in the exploration, marketing, mining, processing, production, refining, storage, or transportation of any mineral or natural resource (read: MLP ETFs in Focus after MLPX -- MarkWest Deal)

The ETN pays a variable quarterly coupon linked to the cash distributions, if any, on the Index constituents. The index currently holds a basket of 79 constituents and is quite concentrated in its top five holdings. Enterprise Products Partners dominates the fund with 14.78% exposure, followed by Energy Transfer Equity and Energy Transfer Partners with 11.25% and 8.08% exposure respectively.

How Does it Fit in a Portfolio?

The fund is an intriguing choice for investors seeking exposure to the U.S. shale energy boom. Moreover, MLPs represent an attractive investment option for such investors in the current low interest rate environment.

Not only do MLPs provide high yields, these also produce relatively stable cash flows and have solid growth potential. Due to the long-term nature of these contracts, they provide relatively consistent and predictable cash flows (read: 3 MLP ETFs for Excellent Income and Growth).
As MLPs are structured as pass-through entities, they do not pay taxes at the entity level and are thus able to pay out most of their earnings to investors. Further, MLPs provide diversification benefits to a portfolio as these have very low correlation with other asset classes including equities and commodities.

Investors should also note that this product is structured as an ETN, so there is some credit risk involved. However, this also rules out tracking error and tax issues, so there is a trade-off.

Can it Succeed?

There are quite a number of unleveraged funds targeting the MLP space with Alerian MLP ETF (AMLP) the most popular product with an asset base of $8.5 billion and average trading volume of more than $4.5 million shares. The fund has an annual dividend yield of 7.5 % (see all MLP ETFs here).
Alerian MLP Index ETN (AMJ) takes the next spot with an AUM base of $4.8 billion - charging 85 basis points as fees, while offering an attractive yield of 6.01%.

Though competition is rife, the new product might be able to garner decent assets as E-TRACS already has quite a number of funds targeting this space. E-TRACS Alerian MLP Infrastructure Index (MLPI), ETRACS Alerian MLP Index ETN(AMU), E-TRACS Alerian Natural Gas MLP Index (MLPG), ETRACS Wells Fargo MLP Ex-Energy ETN (FMLP) and E-TRACS Wells Fargo MLP Index (MLPW) are some of the popular funds by ETRACS.

As far as the leveraged space is concerned, E-TRACS2x Leveraged Long Alerian MLP Infrastructure Index (MLPL) and E-TRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP) are currently the only products in the space and that too by ETRACS itself (read: AMZA: First Actively Managed MLP ETF Hits the Market)

Thus given the popularity of ETRACS and the presence of just a few funds in the leveraged MLP space, MLPV has a fair chance of gaining decent assets.

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E-TRC 2XMLSPMLP (MLPV): ETF Research Reports
E-TRC UBS ALERN (MLPI): ETF Research Reports
JPM-ALERN MLP (AMJ): ETF Research Reports
E-TRC ALRN MLP (AMU): ETF Research Reports
E-TRC UBS AL NG (MLPG): ETF Research Reports
E-TRC EF MLP XE (FMLP): ETF Research Reports
E-TRC UBS WF ML (MLPW): ETF Research Reports
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