Global X Proposes Two MLP ETFs

by on April 19, 2011 | ETFs Mentioned:

Global X, the fast-growing ETF issuer known for its lineup of commodity-focused funds, announced more plans for expansion in the space with the filing for two new MLP ETFs. If approved, the new funds would mark Global X’s first move into the increasingly popular space that has attracted billions of dollars over the last few years. This movement to MLPs has generally been thanks to the higher yields that these products can offer investors over other corners of the market, making them both ideal plays for the long term and intriguing short term plays that can wade through volatility. The two proposed Global X products include:

  • Global X MLP Infrastructure ETF: This proposed fund would seek to replicate the Solactive MLP Infrastructure Index, a benchmark that is intended to give investors exposure to the energy infrastructure Master Limited Partnership asset class. Companies in this fund look to be engaged in the transportation or storage of energy commodities across the country. While these components aren’t directly impacted by changing prices for oil and natural gas, they are indirectly affected as high prices could cut demand and thus make the need for companies that hold storage facilities for the fuels unneeded, thereby hampering the price for some of the underlying components of this proposed fund.
  • Global X MLP Natural Gas ETF: This fund would track the price and yield performance of the Solactive MLP Natural Gas Index. In the index are companies that hold pipelines and other infrastructure assets that help facilitate the movement of natural gas across the country. While the holdings in this fund aren’t directly impacted by natural gas prices, fears of slowing or rapidly increasing demand could greatly impact the outlook for this product.

MLP ETPs: An Increasingly Crowded Space

Currently, there are seven products in the MLPs ETFdb Category, including ETPs from UBS, ALPS, Credit Suisse, JPMorgan, and Morgan Stanley. By far the most popular is the JP Morgan Alerian MLP Index ETN (AMJ) which has amassed just over $2.7 billion since its launch in April of 2009. Only one of the current offerings is structured as an exchange-traded fund; all options besides the Alerian MLP ETF are exchange-traded notes. Because of the unique tax treatment of MLPs, different vehicle structures can have unique tax impacts, depending on individual investor circumstances and the type of account through which exposure is maintained [see Talking MLP ETFs With Kenny Feng Of Alerian].

In addition to AMLP, the proposed Global X ETFs could directly compete with the UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI). This ETN is linked to the Alerian MLP Infrastructure Index, which includes companies that earn at least 50% of EBITDA from assets that are not directly exposed to changes in commodity prices. In the natural gas space, the UBS E-TRACS Alerian Natural Gas MLP ETN (MLPG) looks to be the main competitor to Global X’s proposed fund. This note tracks the Alerian Natural Gas MLP Index [see MLP ETFs: Fact And Fiction].

The main difference of course between the Global X proposed funds and those on the market from UBS is the different structures; both of Global X’s funds look to use an ETF structure while UBS employs an ETN frame. Generally speaking, the distinctions between ETFs and ETNs is pretty small; ETNs are debt instruments that promise to pay out to investors the return of the underlying index minus fees. Due to this system there is no tracking error but there are credit risks to consider. For ETFs, tracking error is a possibility, investor capital is returned even if an issuer goes belly-up. While this is one of the few differences normally in the ETP world investors should be aware that the choice of going between ETNs and ETFs is a much bigger decision when it comes to MLPs. This is because Global X’s funds will have to be structured as C-Corps, meaning that they will be taxed as regular corporations and will either amass a deferred tax liability or a deferred tax asset based on how the fund performs throughout the year. Thanks to this issue, some investors may be more comfortable focusing in on the ETN side of the MLP world [also read MLP Exposure: ETF or ETN?].

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Disclosure: No positions at time of writing.