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MLP ETFs Trading at a Huge Discount to NAV

Sweta Killa

The collapse in oil price has battered the energy sector as a whole, not sparing the master limited partnerships (MLPs) either. In fact, some MLP ETFs have fallen faster than the value of their underlying securities, creating a huge discount to their net asset value or NAV. This suggests an attractive entry point for long-term investors.

This is especially true as the authorized participants (AP) of a discounted ETF steps in and redeems the underlying shares to remove the discount and restore the fund’s value back to its NAV. This process results in profits for the ETF holder when the market price rises relative to NAV (read: Is This the Worst Time For MLP ETF Investing?).   

MLP: Is A Good Bet Right Now?

Trading at deep discounts, the outlook for MLPs is bright amid the oil price rout. This is because most MLPs, which are engaged in the processing and transportation of energy commodities such as natural gas, crude oil, and refined products, are best positioned to withstand the decline in oil prices and be the major beneficiaries of an oil boom in the long term.

Acting as toll-takers, these MLPs earn revenues on the volumes flowing through pipes and not on the commodity price. This nature of business will definitely give a boost to these stocks given that worldwide oil production is on the rise. Unlike exploration and production companies whose profits are directly correlated with commodity prices, MLPs have relatively consistent and predictable cash flows, making them safer and less risky than other plays in the broader energy space (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs).

Beyond the stability, yields are also pretty high thanks to some favorable tax rules - like we 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. Further, MLPs represent a great way of tapping the growing revolutionary developments in the field of unconventional energy.

As a result, the steep decline in MLP stocks and ETFs provides an attractive investment opportunity to long-term investors, looking for growth and income. Below, we highlight some products that were trading at a steep discount to NAV as of January 15 (as per Fidelity):


ETRACS Alerian MLP Infrastructure Index ETN (MLPI): Discount – 5.32%

This product tracks the Alerian MLP Infrastructure Index, which comprises 25 mid-stream energy infrastructure MLPs. It has attracted $1.5 billion in AUM and trades in solid volume of 967,000 shares per day. The note charges 85 bps a year in fees and pays out a hefty yield of 8.04%.


Credit Suisse Cushing 30 MLP Index ETN (MLPN): Discount – 5.13%


This ETN follows the 30 MLP Index, an equally weighted index that uses a formulaic, proprietary valuation methodology and comprises of 30 midstream MLPs. It has attracted $365.5 million in its assets base so far and sees good average daily volume of more than 325,000 shares. Expense ratio came in at 0.85%. The note pays out 7.53% in annual yield.


ETRACS Wells Fargo MLP Index ETN (MLPW): Discount – 4.69%


This note tracks the Wells Fargo Master Limited Partnership Index, which provides exposure to all energy MLPs listed on the New York Stock Exchange or NASDAQ with market cap of at least $200 million. It failed to garner enough investor interest with AUM of just $7 million and sees paltry volume of about 13,000 shares. MLPW charges 85 bps in annual fees and expenses, and pays a solid yield of 9.82% (read: No High-Yield Relief for MLP ETFs Post Fed).


ETRACS Alerian MLP Index ETN (AMU): Discount – 4.68%


This product tracks the performance of the Alerian MLP Index, which provides exposure to 50 publicly traded energy MLPs. It has amassed $351.4 million in its asset base and trades in solid volume of nearly 468,000 shares. It charges 80 bps in annual fees and sports a dividend yield of 7.16%.


RBC Yorkville MLP Distribution Growth Leaders Liquid Index ETN (YGRO): Discount – 4.57%

This note seeks to offer return of the Yorkville MLP Distribution Growth Leaders Liquid Index, which offers access to 25 MLPs exhibiting the highest distribution growth and superior liquidity profiles. It is also unpopular with AUM of $14.5 million and average daily volume of around 15,000 shares. Expense ratio came in at 0.90% and dividend yield stands at 8.54%.


Unfortunately, there are some tax headaches when using the MLP structure, namely the possible need of a K-1 form at tax time. But this issue can be avoided by looking at MLPs that use an exchange-traded structure. This is because 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 that buys and sells the securities making up a particular benchmark (see: all the MLP ETFs here).

Due to this advantage, investors can buy MLP ETNs without the hassle of K-1 at tax time, making the above-products excellent choices for those seeking high yield without the taxation headache.

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E-TRC UBS ALERN (MLPI): ETF Research Reports
CS-CUSHING 30 (MLPN): ETF Research Reports
E-TRC UBS WF ML (MLPW): ETF Research Reports
E-TRC ALRN MLP (AMU): ETF Research Reports
RBC-YORKVILLE (YGRO): ETF Research Reports
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