Guide To MLP ETFs (And ETNs)
Interest in Master Limited Partnerships (MLPs) has climbed significantly over the past few years as the evolution of the exchange-traded product structure has made accessing this asset class cost-effective and easy for investors of all walks. MLPs have caught the attention of yield-hungry investors in particular as this often times overlooked corner of the domestic energy market offers attractive, steady dividend distributions similar to utility companies [see also Five Commodity MLPs With Sky High Yields].
MLPs are publicly-traded limited partnerships, an overwhelming majority of which operate as energy infrastructure companies. These businesses own and operate natural gas and crude oil pipelines and storage tanks; as such, these companies offer indirect exposure to the energy market since their revenues are not directly tied with underlying commodity prices. MLPs operate under the “toll road” business model in the sense that they generate fee-based revenues, which gives them a risk/return profile that’s more comparable to a utility company rather than an energy producer or explorer [see also MLP ETFs: Fact And Fiction].
For investors interested in MLP exposure, there are potential advantages in both the ETF and ETN structures. ETNs may offer more favorable tax treatment if the underlying MLPs appreciate significantly in value. Furthermore, ETNs eliminate tracking error since they are debt securities, which also exposes investors to the credit risk of the issuing institution. Investors focusing on after-tax yield may opt for an MLP ETF however, as the treatment of distributions is generally more favorable for this product structure. Investors need to take a look under the hood and consider their objectives before establishing a position because the product structure can have a material impact on your MLP investing experience.
As such, below we outline the offerings in the MLPs ETFdb Category, highlighting noteworthy features for each one:
- JP Morgan Alerian MLP Index ETN (AMJ): This is the most popular product in the MLP space, having accumulated nearly $4.4 billion in assets under management since launching in April of 2009. JP Morgan recently announced that it will cap the shares of AMJ outstanding, which could eventually lead to a premium in this ETN’s price.
- ALPS Alerian MLP ETF (AMLP): This is the second most popular option in the MLP space, with the distinguishing factor being that it’s structured as an ETF; AMLP has accumulated an impressive $3.2 billion in assets under management since launching in late 2010 [see Do You Need An MLP ETF?].
- UBS E-TRACS Alerian MLP Infrastructure Index (MLPI): Similar to AMLP, this UBS alternative is also linked to the Alerian MLP Infrastructure Index, except it’s structured as an ETN. A head-to-head comparison of the performances of these products shows that MLPI has a big edge in terms of returns over the past year.
- UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL): This ETN offers 2x monthly leveraged exposure to the same index as MLPI and AMLP. While that leverage introduces some additional risk, it also creates the opportunity for some pretty impressive yields. MLPL has an annual dividend yield of about 11%, which could make this ETN very appealing to yield-hungry (and risk tolerant) investors.
- Credit Suisse Cushing 30 MLP Index ETN (MLPN): This ETN is linked to an equal weighted index that uses an objective, formula based, proprietary valuation methodology to rank the MLPs for inclusion in the portfolio. For those looking to maintain a balanced portfolio (or simply to steer clear of cap weighting), there could be some appeal to MLPN.
- Exchange Traded Concepts Yorkville High Income MLP ETF (YMLP): This ETF offers exposure to all sorts of MLPs, going beyond the energy sector; in addition to holding royalty trusts and energy firms, YMLP also makes allocations to companies involved in marine transportation and the production and marketing of other natural resources including timber and fertilizers. It also focuses on higher yielding MLPs, which results in a distribution yield that exceeds many competing products (the underlying index recently had a distribution yield of about 8.7%).
- UBS E-TRACS Wells Fargo MLP Index (MLPW): This ETN is linked to the Wells Fargo Master Limited Partnership Index; top holdings include Enterprise Product Partners (EPD) and Kinder Morgan Energy Partners (KMP).
- Morgan Stanley Cushing MLP High Income Index ETN (MLPY): This ETN is linked to a dividend-weighted index consisting of 30 MLPs which hold energy infrastructure and related shipping assets in North America. According to its fact sheet, MLPY has a current annual dividend yield of 7.04%.
- UBS E-TRACS Alerian Natural Gas MLP Index (MLPG): This MLP ETN offers targeted exposure to the natural gas industry; MLPG’s underlying portfolio consists of holdings which generate the majority of their revenues from the transportation, storage, and processing of natural gas and natural gas liquids.
- Global X MLP ETF (MLPA): This ETF boasts the cheapest price tag in the MLP space; MLPA is hard to pass up at 0.45% in annual expense fees considering that the category average is 0.82%.
- First Trust North American Energy Infrastructure Fund (EMLP): This actively-managed ETF invests in MLPs, Canadian income trusts, pipeline companies, and utilities that generate at least half of their revenues from the operation of infrastructure assets such as pipelines and power transmission.
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Disclosure: No positions at time of writing.