The red hot energy MLP space continues to heat up, with ALPS announcing today the launch of the first exchange-traded fund offering exposure to Master Limited Partnerships that earn the majority of their cash flows from the transportation, storage, and processing of energy commodities. The Alerian MLP ETF (AMLP) will seek to replicate the performance of the Alerian MLP Infrastructure Index, a benchmark comprised of 25 energy infrastructure MLPs.
That same benchmark is linked to the UBS E-TRACS Alerian MLP Infrastructure (MLPI), a product launched earlier this year. MLPI is structured as an exchange-traded note (ETN), meaning that is is a senior debt instrument issued by a financial institution. AMLP, on the other hand, is structured as an exchange-traded fund, meaning that its underlying holdings consist of the index constituents.
AMLP is the latest addition to a corner of the domestic energy market that has attracted significant interest in recent months. JPMorgan was the pioneer of the MLP space, launching its Alerian MLP Index ETN (AMJ) in 2009. Since then a number of other firms have waded into the MLP waters; in addition to MLPI, UBS has launched a more targeted Alerian Natural Gas MLP ETN (MLPG) as well as a 200% monthly leveraged ETN linked to the Alerian MLP Infrastructure Index (MLPL). Credit Suisse has also jumped into the game launching an ETN linked to an index maintained by Cushing (MLPN). All of these existing products have been structured as ETNs, meaning that they minimize tracking error but also expose investors to credit risks which are associated with holding debt [also read Basics Of ETN Investing].
The MLP asset class has become popular in recent years for a number of reasons. With yields on Treasuries hovering near record lows, investors have been forced to get creative in their search for current returns. For many, that search has led to MLPs, which often pay coupon rates well north of 5%. The dividend yield on the index underlying AMLP currently stands at about 6.9%–more than 600 basis points higher than yields on short-term Treasuries and higher even than many corporate bond ETFs. MLPs are technically stocks but the companies are generally structured as limited partnerships, which means that they are not taxed like corporations which allows for a greater portion of earnings to be paid out to shareholders [also read MLP ETNs: A Different Breed Of Equity Exposure].
MLPs have also been embraced as a potential diversifying agent. These securities typically generate fee-based revenues, which tend not to be directly tied to changes in commodity prices. Moreover, since the demand for the services offered by MLPs tends to be relatively stable, these securities have historically exhibited low correlation to broader equity markets. Over the last two decades, MLP returns have exhibited statistically insignificant correlation with equity markets.
The exchange-traded structure has proven to be an efficient vehicle for issuers to offer MLP exposure. They eliminate the need for K-1′s, which can complicate tax reporting for investors looking to invest in this asset class through individual securities. “Individual MLPs also come with tax headaches that have made them complicated for both small investors to own and for many money managers to package into mutual-fund products,” writes Tom Lauricella. “The ETF structure helps alleviate some of those tax issues.” Moreover, the qualified dividends and 401(k) eligibility have simplified the experience for investors and could make this product a rising star for those seeking exposure to this increasingly popular market [read MLP Space Getting More Crowded].
Disclosure: No positions at time of writing.
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