First Trust Plans Active Energy Infrastructure ETF

by on May 24, 2011

First Trust has been one of the most active ETF issuers on the product development front, launching 16 new products so far in 2011 (only iPath has introduced more new ETPs this year). And the Wheaton, Illinois-based company continues to fill out its pipeline, recently fining details on what would be an actively-managed fund that taps into a corner of the domestic energy market. The First Trust North American Energy Infrastructure Fund would invest in U.S. and Canadian companies deemed to be engaged in the energy infrastructure segment of the energy and utilities sectors. According to the filing, the underlying portfolio could include common stocks, depositary receipts, master limited partnerships (“MLPs”), MLP I-shares, MLP related entities, pipeline and power utility companies, Canadian energy infrastructure companies and Canadian Energy Infrastructure Trusts (“CEITs”).

While many energy-related ETFs can exhibit a strong correlation to the prevailing market prices for energy commodities, the proposed First Trust fund would be managed with a focus on “steady fee-for-service income” and limited cyclical energy exposure. Firms that own and operate energy infrastructure, such as pipelines, generally realize relatively stable demand for their services, and generate revenues that are not impacted materially by changes in crude oil or natural gas prices. These firms essentially own the tollway; just as tollways collect regardless of the make or model that passes through, infrastructure companies generate similar revenues if crude costs $50 or $150 per barrel [see MLP ETNs: A Different Breed Of Equity Exposure].

There area number of pure play MLP exchange-traded products, including both ETNs and ETFs. In addition to the differences related to tracking error and inherent credit risk, the selection of investment vehicle can bring about unique tax ramifications for investors establishing exposure to the MLP sector. If the MLP portion of a portfolio crosses a certain threshold, the fund must be structured as a C-corporation for federal income tax purposes, and as such may incur deferred tax assets and liabilities based on the performance of the underlying securities. If the proposed fund kept the MLP portion of its portfolio under 25%, it may be able to qualify as a Regulated Investment Company and hold on to certain tax advantages [see MLP ETFs: Fact and Fiction].

The filing indicated that the fund would be managed with an eye on distributions, noting that “a professionally managed portfolio of higher dividend paying and non-cyclical energy infrastructure companies offers an attractive balance of income and growth.”

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Disclosure: No positions at time of writing, photo is courtesy of Luca Galuzzi.