Master limited partnerships (MLPs) have long been a popular choice among investors, as these investments generate attractive and steady tax-advantaged income. Darren Schuringa, CEO of Yorkville ETF Advisors, recently took the time to discuss the compelling Yorkville High Income Infrastructure MLP ETF (YMLI) and his thoughts on where he thinks the global energy industry might be heading [see Free Report: How To Pick The Right ETF Every Time].
ETF Database (ETFdb): What was the inspiration behind creating the Yorkville High Income Infrastructure MLP ETF (YMLI)?
Darren Schuringa (DS): The inspiration for all our products has been to provide investors with exposure to our 20+ years of expertise investing in energy development through MLPs. It is worth noting that the Yorkville MLP Core Income Strategy, our flagship SMA portfolio, has an audited track record of more than 11 years and has returned an annualized +14.1 percent since its inception.
We created YMLI as the next step in offering a complete suite of MLP solutions via exchange traded products. Our research found that the MLP asset can be divided into two broad sectors, infrastructure and commodities, with each offering unique attributes. For example, we found commodity MLPs provide higher yields and faster distribution growth with about the same volatility. Infrastructure MLPs, on the other hand, provide more stable income and account for about 75 percent of the market capitalization [see How To Find The Best MLP ETF].
Besides stable income, infrastructure MLPs have more direct exposure pipelines, storage and processing systems that will see increased demand as a result of the growth in U.S. energy production. Our first ETF to market, the Yorkville High Income MLP ETF (YMLP), gave investors pure exposure to commodity MLPs. Therefore, we knew our second ETF product need to focus on infrastructure MLPs.
ETFdb: What separates YMLI from other funds targeting MLPs on the market?
DS: No other firm offering an MLP ETF has a 20-year track record of MLP investing experience and research. Our goal is not to expand into other asset classes or to haphazardly design an index. It is quite the opposite. We spent countless hours understanding the MLP asset class and how we could design an investable fundamental index to the benefit of investors.
The Solactive High Income Infrastructure MLP Index, which YMLI tracks, is the only MLP ETF that utilizes a three-level index screen. The first screen focuses on liquidity, meaning all index constituents have market capitalizations greater than $1 billion and three-month average daily trading volume of $4 million. The second screen analyzes both quality of income and distribution growth, which are arguably the most important factors to research when investing in MLPs. Investors who desire stable income need access to MLPs that historically grow their distributions [see 10 Questions About ETFs You've Been Too Afraid To Ask].
The resulting index holds 25 constituents that provide blue chip energy infrastructure exposure. The final step is to equal weight the index, resulting in a less concentrated high income portfolio. In addition to better risk management, studies have shown that equal weighted portfolios generally produce better returns. Furthermore, this weighting methodology is aligned with how we structure our actively managed portfolios.
ETFdb: Would you consider YMLI more of a complement or an alternative for someone who already owns or is thinking of buying the Yorkville High Income MLP ETF (YMLP)?
DS: Generally, most investors are underinvested in MLPs, so we advise investors to first gain access to MLPs, whether that is through YMLI, YMLP or other options. To answer the question directly, we view YMLI and YMLP as complements because they have no overlap in holdings and together provide complete exposure to all subsectors of the MLP universe.
YMLP invests primarily in U.S. energy commodity-based MLPs, while YMLI invests in U.S. energy infrastructure-based MLPs, so investors can utilize Yorkville’s MLP expertise to customize their exposure depending on their needs.
The chart below shows how the YMLI and YMLP indexes can complement each other in terms of yield and annualized return [see 101 High Yielding ETFs For Every Dividend Investor].
ETFdb: Aside from attractive dividend distributions, what else might investors find appealing about this asset class?
DS: It’s true that many investors will be initially attracted to the income benefits and favorable tax treatment. But investors should not view MLPs as only an income investment or bond substitute. The partnership structure enables MLPs to focus on growing their distributions over time, which positions MLPs as a hedge against inflation, while also positioning them well for capital appreciation potential.
MLPs are an asset class in growth mode. It is still a relatively new asset class with only a $375 billion market cap. It is estimated that approximately $300 billion in direct energy infrastructure investment will be needed in the coming years to meet the US energy boom. This infrastructure demand will drive future growth for MLPs.
Historically, MLPs have performed as a non-correlated asset:
ETFdb: Broadly speaking, what are some of the longer-term trends that you are seeing in the global energy market?
DS: Yorkville has never been more bullish on energy infrastructure. By now, most investors are familiar with the shale revolution that has unlocked vast new energy reserves. The U.S. has become the fastest growing energy-producing nation in the world and some forecasts suggest the U.S could become energy independent by as early as 2020 [see Energy Bull ETFdb Portfolio].
Without a significant investment in infrastructure (Yorkville forecasts up to $300 billion is needed) to transport oil and natural gas from the wellhead to the end user, the U.S. will struggle to achieve energy independence. This is a huge tailwind for those investing in energy infrastructure investments such as MLPs for the next 10 to 20 years. MLPs are in the favorable position that REITs were in 30 years ago as the US. housing sector started to boom.
Bottom Line: For those looking to tap into the lucrative world of MLPs, the Yorkville High Income Infrastructure MLP ETF (YMLI) puts a compelling twist on the space. Not only does the fund provide attractive distributions, it also gives investors an opportunity to gain exposure to the infrastructure side of MLPs, a sector that may see significant growth in the near future as the global economic recovery picks up steam.
Disclosure: No positions at time of writing.