As the ETF industry continues to grow, the size of the product lineup has raced towards 1,300 and each week seemingly brings a slew of new product introductions. While some investors have no qualms about jumping into a new ETF right off the bat, others prefer to limit their investable universe to products that have at least a partial track record.
During the month of July, 25 ETPs will hit their one year anniversary, potentially opening them up to investment by those who face age restrictions in their portfolios. Many of the ETFs that debuted in July of 2010 were innovative, first-to-market products; the month’s launches included the first small cap India ETF (SCIN), a suite of ex-U.S. sector funds from iShares, and a fund focused exclusively on the lithium industry (LIT). Also hitting the market was the E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) from UBS, a product offering leveraged exposure to an increasingly popular asset class.
Investments in MLPs have become popular in recent years thanks in large part to the stable and substantial distribution yields offered by this corner of the domestic energy market [see Kenny Feng On The Appeal Of MLPs]. And MLPL turned some heads at the time of launch with an effective distribution yield that seemed too good to be true (the annual leveraged yield was close to 13%).
Catching Up With MLPL
So how has MLPL performed in its first year of existence? For investors who bought into this ETN hoping to generate some juicy current returns, it’s done quite well. Once MLPL makes its distribution for the second quarter of 2011, the total payouts for the first year will total about $3.69–about 10% of the current price. Anyone who bought into MLPL when it launched last year has already seen about 15% of their investment returned through distributions [see Dividend ETF Special: 25 Funds With Juicy Yields]:
The other interesting (and potentially confusing) aspect of MLPL is the leverage offered. Unlike many leveraged ETPs, MLPL resets exposure on a monthly basis, meaning that over the course of a calendar month it seeks to deliver returns that are the amplified results of an underlying index. There has been general confusion over the performance of leveraged ETFs when held for extended periods of time; some investors mistakenly believe that such as strategy is guaranteed to erode returns. In reality, the performance of leveraged ETFs over multi-session holding periods depends on the direction of the underlying markets; in trending markets, the impact of compounding returns may be positive. In seesawing markets, it may eat into returns.
Because MLPL resets exposure monthly (as opposed to daily), the potential impact of compounding returns (both positive and negative) is diminished considerably. To understand exactly what MLPL seeks to accomplish, it helps to look at how the ETN has performed relative to another E-TRACS product that offers non-leveraged exposure to the same Alerian MLP Infrastructure Index to which MLPL is linked:
Over the course of the last year, the monthly reset feature worked out just fine for MLPL; this ETN added about 50%, or more than 2x the returns generated my MLPI:
It’s interesting to note that an ETP offering 2x daily leveraged exposure to the same index would have realized nearly identical returns to MLPL over the course of the year; both would have generated total returns of about 50%.
Worth A Shot?
MLPL’s first year was a solid one for those with a position in the ETN (the product recently had about $100 million in assets). The explicit leverage built into the product obviously makes this note a somewhat risky bet that is capable of big swings in either direction over a relatively short period of time. But for yield hungry investors looking beyond fixed income for distributions, MLPL has been a home run; the annualized yield is now north of 10%, and the track record of juicy distributions should eliminate any doubt about the ability of this product to turn that theoretical yield into cold, hard cash.
Disclosure: No positions at time of writing.