The first quarter of 2010 was one of the most active periods in recent memory for the ETF industry. Approximately 60 new funds hit the market during this three month period, continuing the impressive expansion and innovation that has become standard in a space that has huge potential (see the March ETF Roundup). This trend looks to continue in the second quarter of the year, as UBS announced today the launch of the E-TRACS Alerian MLP Infrastructure Index (MLPI).
MLPI is designed to track the performance of the Alerian MLP Infrastructure Index and pay a variable quarterly coupon linked to the cash distributions paid on the Master Limited Partnerships (MLPs) included in the index. The benchmark to which this product is linked measures the performance of the infrastructure component of the MLP asset class, and currently consists of 25 energy infrastructure MLPs. A look at some of the index’s major components gives an idea of the composition of the underlying assets. Enterprise Products Partners, which accounts for nearly 10% of the benchmark, maintains pipelines, salt dome storage, natural gas processing plants, tow boats and barges, natural gas import and export terminals, and offshore platforms.
Because many MLPs generate fee-based revenues, they tend to exhibit a relatively low correlation with spot commodity prices. The fact sheet for MLPI notes that index constituents “each earn at least 50% of EBITDA from assets that are not directly exposed to changed in commodity prices.”
MLPI becomes the second U.S.-listed ETN focusing on the MLP sector, joining the JP Morgan Alerian MLP Index ETN (AMJ). The JPMorgan product maintains a broader scope, while MLPI will focus specifically on infrastructure MLPs. Still, there will be significant overlap between the two products. The top ten holdings of each (see the list for AMJ here and MLPI here) contain many of the same names in similar allocations, although MLPI is currently offering a slightly higher yield. Both charge an expense ratio of 0.85% and both are structured as exchange-traded notes.
AMJ has been one of the most successful new product launches in recent memory. AMJ saw more than $200 million in cash inflows in February, and total assets were recently approaching the $1 billion mark. UBS is no doubt hoping to replicate this success with its infrastructure MLP fund.
Investors have embraced exposure to MLPs through the exchange-traded structure for several reasons. First, these securities generally pay attractive dividend yields. In the current low-interest rate environment, yield-hungry investors have begun seeking out alternative asset classes that can deliver a meaningful current return. The current yield on MLPI is about 7%, significantly higher than almost all fixed income ETFs (see Five Fixed Income ETFs For Yield Hungry Investors). Second, the coupons associated with ETNs are reported as ordinary income on Form 1099, eliminating the administrative hassle of filing K-1s.
UBS has been very active in expanding its lineup of exchange-traded products in recent months. The Dow Jones-UBS Commodity Index Total Return (DJCI) was introduced as a low cost alternative to DJP last year. In January the company launched the E-TRACS S&P 500 Gold Hedged Index (SPGH), which is designed to simulate the returns of investing equal dollar amounts in the S&P 500 Total Return Index and long positions in the near-term COMEX gold futures contracts.
Disclosure: No positions at time of writing.