Perhaps no corner of the ETF market has exploded in recent years quite as quickly as the MLP space. JP Morgan launched the Alerian MLP Index ETN (AMJ) in early 2009, and the fund quickly attracted more than $1 billion in assets [see Most Successful New ETFs Of 2009]. UBS followed earlier this year, offering the similar Alerian MLP Infrastructure Index ETN (MLPI), while Credit Suisse brought out its Cushing 30 MLP Index ETN (MLPN). Today, UBS introduced the first exchange-traded product offering leveraged exposure to the MLP sector, launching the E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL).
Like other products offering exposure to the MLP sector, MLPL is structured as an exchange-traded note (ETN). That means that it is a senior unsecured debt security that is linked to the performance of an underlying index (in this case the Alerian MLP Infrastructure Index).
According to the fund’s prospectus, MLPN is designed to provide “two times leveraged long exposure to the compounded monthly performance” of its benchmark. That’s an important distinction that separates this product from the leveraged ETFs offered by ProShares and Direxion. Most leveraged ETPs operate with a daily objective, seeking to provide amplified returns over a single trading session and rebalancing exposure each day. MLPN, on the other hand, is linked to a benchmark that rebalances its exposure monthly. Relative to daily leveraged ETFs, that reduces the potential for “return erosion” during volatile markets as well as the potential for enhanced returns during trending markets [read more about Leveraged ETF Rebalancing].
Appeal Of MLPs
Master Limited Partnerships (MLPs) are publicly-traded entities, the majority of which operate in the energy infrastructure industry by owning assets such as crude oil and natural gas pipelines. Revenues of MLPs tend to be correlated with demand for energy commodities. Demand for these commodities tends to be less volatile than commodity prices; because MLP revenues are generally fee-based, this asset class can provide a relatively low correlation to the general market.
MLPs also tend to offer juicy dividend yields, a feature that is particularly attractive in an environment where rates are expected to remain near record lows for the foreseeable future. Recently, the annual index yield on the benchmark to which MLPL is linked stood at 6.87%; that translates into an annual leveraged yield of almost 13% [see Five ETFs For Yield Hungry Investors].
Investors have embraced ETNs as an efficient means of accessing this corner of the domestic energy market. The exchange-traded structure allows investors to avoid the hassles associated with K-1 forms and other administrative headaches, while offering exposure with no tracking error.
Disclosure: No positions at time of writing.