MLP ETF Investing: The Surge Continues
Although equities have had a strong run so far this year, oil prices have not kept up the pace. Crude oil remains stubbornly around the low to mid $90/bbl level in WTI terms, and shows no sign of breaking out in the near future thanks to a strong dollar.
While this situation certainly had a negative impact on commodity investments, it hasn’t been terrible news for the MLP ETF space (read: Time to Sell This Commodity ETF?). MLP ETFs have had an excellent start this year and led the way higher in the traditional energy space, encouraging many investors to consider this often overlooked asset class.
What are MLPs?
MLPs, or Master Limited Partnerships, are publically traded partnerships that are generally engaged in the transportation, storage, production, or mining of minerals and natural resources.
They are relative safe and less risky than other plays in the broader energy space.
This safety stems from the ‘toll way’ models of these businesses, as MLPs often operate pipelines or similar energy assets that ferry oil, natural gas, and other products across the landscape. The firms in this space are not affected by the changes in oil and natural gas prices, thereby having stable revenues (read: 3 Commodity ETFs Still Going Higher).
Beyond this stability, yields are also pretty high thanks to some favorable tax rules—like what you see in the REIT space-- that push firms in the MLP space to pay out substantially all of their income to investors on a regular basis. This results in more than 90% of income going out to partners in order to avoid the issue of corporate taxation.
In addition to high yield and the potential for capital appreciation, MLPs also have lower volatility and provide diversification benefits to the portfolio (read: 3 Excellent ETFs for Income Investors).
MLP ETFs/ETNs in Focus
MLP ETFs and ETNs have been extremely popular in recent years thanks to increased interest in energy investing and a high payout potential. A host of new products have been introduced in the space this year such as Barclays ETN+ Select MLP ETN (ATMP), Yorkville High Income Infrastructure MLP ETF (YMLI), Global X Junior MLP ETF (MLPJ) and iPath S&P MLP ETN (IMLP), nearly all of which have seen tremendous inflows in the short time these have been on the market.
This is because investors continue to pour assets into a segment that promises solid income potential at a time when many bond yields look paltry and bond prices look stretched (read: Time for Inverse Bond ETFs?).
Yet, unfortunately, there are still some tax headaches when using the MLP structure, namely the possible need for a K-1 form at tax time. However, there could be a way to avoid this issue by looking to MLPs that use an exchange-traded structure. While some MLP ETFs still face the K-1 issue at tax time, those that utilize an ETN structure will not.
ETNs do not actually hold the securities of an underlying index. Instead, an ETN is an unsubordinated debt security that promises to pay out a return that is equal to an index. This is completely unlike an ETF which buys and sells the securities that make up a particular benchmark.
Due to this advantage, investors can buy MLPs without the hassle of K-1s at tax time, making MLP ETNs an excellent choice for those looking for exposure to the high yield segment without the taxation headaches (read: No Dividend Tax Debate for these High Yield ETFs).
For these investors, we have highlighted a handful of MLP ETNs below, any of which could make for quality picks that still avoid some of the key issues that plague not only general MLP investments, but MLP ETFs as well:
JPMorgan Alerian MLP Index ETN (AMJ)
Launched in April 2009, this is by far the most popular and the largest ETN in the MLP space with AUM of roughly $5.7 billion and average daily volume of more than 1.3 million shares.
With holdings of 50 securities, the product provides exposure to midstream energy MLPs and tracks the Alerian MLP Index. The note puts more than 60% in the top 10 holdings, suggesting heavy concentration across individuals (see more in the Zacks ETF Center).
Enterprise Products Partners takes the top spot with 15.46% share alone, while the next two spots – Kinder Morgan Energy Partners and Plains All American Pipeline – together make up for 16.27% of the assets. From a market cap look, large caps account for 55%, while mid caps (27%) and small/micro (18%) also receive decent allocations.
The ETN charges investors 85 basis points a year in fees for its services and is one of the strong performers in the MLP space. AMJ gained about 18.7% year-to-date and its yield comes in at a robust 3.43%, suggesting that it could be a decent source of yield (read: Two Unconventional Sources of ETF Yield).
Morgan Stanley Cushing MLP High Income Index ETN (MLPY)
Although this note suffers from low volume – and thus wide bid ask spreads – it could be an interesting yield destination for those looking for more exposure to the MLP space. The product tracks the Cushing MLP High Income Index, holdings 30 energy and shipping focused firms based in North America.
Exposure is well diversified across the group, as no single company makes up more than 5.5% of the assets. VR Partners, Energy Transfer Partners and Buckeye Partners occupy the top three positions in the basket. Still, investors should note that this is a small cap centric product with roughly half of the assets going to this cap level.
This product results in an excellent yield of over 6.9%, while fees are like other MLP ETNs at 85 basis points a year (read: 3 Red Hot Dividend ETFs). With AUM of just $21.5 million, MLPY is another solid performer in the space this year, surging 11.1% year-to-date.
UBS ETRACS Alerian Natural Gas MLP Index ETN (MLPG)
For focus on the natural gas corner of the MLP world, investors have MLPG, a relatively less popular note from UBS. The product has amassed only $30 million in AUM and trades in small volumes resulting in increased cost in the form of a wide bid/ask spread.
The note seeks to match the performance of the Alerian Natural Gas MLP Index and pays a variable quarterly coupon, net of fees and expenses. This benchmark consists of firms that generally earn the majority of their cash flow from the transportation, storage, and processing of natural gas and natural gas liquids and comprises 20 stocks in total (read: Natural Gas ETFs Soaring in 2013).
Investors should note that mid cap securities consist of half of the portfolio, with small caps (35%) comprising much of the rest. In terms of individual holdings, the product is equally concentrated across its individual securities. Access Midstream Partners, Atlas Pipeline Partners and Boardwalk Pipeline Partners take the top three spots in the basket.
Fees for this note also come in at 85 basis points a year, although the yield is rather robust at roughly 5.28% per annum. The ETN added 13.7% so far in the year, putting it in the middle of road on this list.
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