2013 was pretty bumpy for interest-rate sensitive sectors like
Master Limited Partnerships (MLPs) thanks to the Fed tapering talks
which pushed up rates. Despite this sluggish trend, MLPs emerged as
solid performers, and ended the year with decent average gains of
With the Fed finally deciding on a soft QE cut-back (worth $10
billion per month) from January, investors appeared apprehensive
about MLP performance heading into 2014. However, the trend doesn't
seem to be slowing down by any means (read:
MLP ETFs: Still Good for Income Investors?
In fact, the decent run in 2013, braving the rate issues, might
have encouraged fund issuers like Direxion to roll out a new MLP
ETF in the market. The issuer's new MLP product called
Zacks MLP High Income Shares ZMLP
hit the market on January 23, 2014.
Zacks MLP High Income Shares: ZMLP
This ETF looks to track the Zacks MLP Index which is a benchmark of
master limited partnerships engaged in the transportation, storage,
processing, refining, marketing, exploration, production, and
mining of natural resources and trades on North American stock
The index rules out companies not having at least $300,000,000 of
market capitalization. The index follows a quantitative rule-based
strategy and takes value, liquidity, short interest, dividend yield
and other factors into consideration for inclusion in its
Currently, the MLP ETF holds 25 firms in its basket. The components
of the portfolio are equal weighted each having about 4% exposure
of the total. In terms of individual holdings, Hi-Crush Partners LP
(4.82%), Alon USA Partners, LP (4.71%), and NuStar Energy L.P.
(4.55%) take up the top three spots.
The portfolio is inclined toward smaller capitalization levels as
these take up about half of the exposure followed by mid caps which
account for one-fourth of the total assets (see more on ETFs in the
Zacks ETF Center
Investors should also note that ZMLP is tilted toward oil & gas
pipelines (44%). Energy exploration, and oil refining and marketing
also account for decent allocations at 17% and 16%, respectively.
Rounding out the portfolio is an 8% allocation to natural gas
utilities, 7% to coal & alternative energy, 5% to metal and
mining and 4% to agricultural chemicals.
ZMLP charges an expense ratio of 65 basis points and looks to
deliver a dividend yield of 7%. Another important trait of this
product is its structure as an ETF.
Also, the product is built as a C-Corporation which takes care of
the K-1 headache of investors. However, before shareholders get
paid out, the C-Corp has to pay taxes, reducing the size of
distributions but eliminating the tax disclosure issue.
How Does It Fit in a Portfolio?
This ETF could be an interesting choice for investors seeking broad
exposure to the MLP space with a focus on income. Moreover, the use
of an equal weight strategy could keep the portfolio balanced among
various companies and help in avoiding heavy concentration risk.
The product is reasonably priced at 65 bps, though not extremely
cheap, as the average expense ratio of the MLP ETFs space stands at
80 bps a year. ZMLP is also one of the highest income
generating instruments in the space. Hence, the fund carries the
potential to attract investors (read:
Boost Income and Growth with MLP ETFs
Investors should realize that the product's major focus on smaller
caps equities will likely help it to trend higher in a reviving
U.S. economy and deliver increased capital appreciation along with
higher income payouts. All these could make ZMLP an interesting
Can it Succeed?
At present, the MLP ETF space is overcrowded with
Alerian MLP ETF (
topping the list having amassed about $7.58 billion in assets.
Alerian MLP Index ETN
E-TRACS Alerian MLP Infrastructure Index (
round the top three positions with, respectively, $5.8 billion and
$1.6 billion in assets. This will make it somewhat hard for ZMLP to
attract huge onlookers without some solid outperformance (read:
Barclays Debuts New MLP ETF (ATMP)
One good point is that these three have expense ratios at 0.85%
which is way higher than what the newly launched ZMLP is charging
now. Also, AMLP has some significant concentration risks in its top
And when it comes to dividend yield, ZMLP might steal the show in
the space because only one product
Cushing MLP High Income Index ETN (
provides a better yield at 7.46%.
Apart from MLPY, at present no other MLP product can beat the yield
of ZMLP. So, it is pretty clear that the new Direxion product will
be contending its peers primarily on yield and to some extent on
price and equal-weight strategy (read:
High Dividend ETFs to Buy Even If the Fed
We expect the segment and the newly introduced fund to hold up well
in 2014. Investors worrying about rate hikes should note that the
Fed's decision for a further taper in 2014 will depend on whether
inflation and employment perk up at a desired pace.
That means that a gradual interest rate rise in a modestly
inflationary environment may not prove that bad for the
rate-sensitive sectors, suggesting that investors may want to take
a closer look at this interesting corner of the market for picks in
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Disclosure: Zacks manages the index underlying ZMLP.
JPM-ALERN MLP (AMJ): ETF Research Reports
ALERIAN-MLP (AMLP): ETF Research Reports
E-TRC UBS ALERN (MLPI): ETF Research Reports
MS-CUSH MLP HI (MLPY): ETF Research Reports
DIR-ZAC MLP HIS (ZMLP): ETF Research Reports
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