The floodgates are officially open. Since JP Morgan’s Alerian MLP Index ETN (AMJ) became a smash hit with investors, a number of other issuers have entered into the space, providing more and more options for accessing a unique corner of the domestic energy market. UBS has been particularly active, introducing the Alerian MLP Infrastructure ETN (MLPI) at the end of the first quarter and following up with a 2x leveraged version (MLPL) earlier this month.
Today UBS added another product to its MLP suite, rolling out the E-TRACS Alerian Natural Gas MLP Index ETN (MLPG). This exchange-traded note will be linked to the Alerian Natural Gas MLP Index, a benchmark that consists of companies that the majority of their cash flow from the transportation, storage, and processing of natural gas and natural gas liquids. There will be some overlap with existing MLP products, but the targeted focus on natural gas MLPs also introduces some new securities; Copano Energy (7%) and Spectra Energy Partners (6.9%) which are among the largest individual components of the underlying index.
More Juicy Yields
Similar to other MLP products to hit the market, MLPG will likely lure investors with an attractive current return. According to the issuer web site, the current annual index yield recently stood around 6.6%. With interest rates expected to remain near record lows for the foreseeable future and cash-strapped companies reeling in dividends, investors have begun looking elsewhere for securities that can offer an attractive current return. Many of those have found the answers in MLPs, which have a history of consistently paying out significant portions of earnings in the form of distributions [see Five ETFs For Yield Hungry Investors].
Some investors might look to pounce on MLPG as a means of establishing exposure to the popular commodity found within the ETNs name–natural gas. Although MLPG focuses exclusively on companies that rely on natural gas for a substantial portion of their revenues, the new ETN won’t necessarily serve as a great proxy for natural gas prices. MLPs generally own infrastructure assets such as pipelines, and generate fee-based revenues from the transfer of commodities. So revenues of MLPs tend to be correlated with demand for energy commodities, which is generally less volatile than commodity prices. As such, MLPs may also have appeal to investors looking to add a diversifying agent to their portfolios, since these securities can have relatively low correlations to the broad market [see Three Low Beta ETFs].
Like all other MLP products on the market, MLPG is structured as an ETN; in exchange for eliminating tracking error that can plague ETFs, investors take on some degree of credit risk since they are effectively purchasing a debt security.
Disclosure: No positions at time of writing.