Global X Launches Low-Cost MLP ETF

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The Global X MLP ETF (NYSEArca:MLPA) went live today, going head-on against the ALPS Alerian MLP ETF (NYSEArca:AMLP) with a similar portfolio that boasts the lowest price tag in the segment.

MLPA, which will track a Solactive Index and comprise some 30 MLPs involved in everything from transportation to storage to processing, refining, marketing, and mining of natural resources, costs only 0.45 percent. That compares to 0.85 percent expense ratio for both AMLP, and the segment's largest ETN, the $4 billion JP Morgan Alerian MLP ETN (NYSEArca:AMJ).

Indeed, MLPA's portfolio is in a way a me-too fund offering exposure to the MLP market that's nearly identical to AMLP's, aside from the fund's slightly broader diversification in holdings thanks to its inclusion of more production and exploration partnerships than AMLP has. As such, their performance should also be similar.

What investors will get with MLPA that they didn't before is an "enhancement" of income over AMLP as they get an extra 0.40 percent added to the fund's returns, Bruno del Ama, chief executive officer at New York-based Global X Funds, the company launching the ETF, said in a telephone interview.

"We are not in the business of just adding another ETF to the market and adding complexity to investors," del Ama said. "We only bring value-added funds. In this case, the value-add is a low-cost structure."

MLPs are partnerships that generate most of their income from the natural resources sector, but they make money from fees rather than from the underlying commodities themselves, which protects them from volatility spikes in commodities prices.

That structure also means MLPs are not taxed as corporations, a difference that means they tend to pay hefty dividends, an attractive feature in times of ultra-low interest rates. Indeed, MLPs have recently been paying higher yields than some other income asset classes such as REITs and utilities, and they have outpaced many equities-focused portfolios.

The pipeline-type business model is a source of steady income that adds stability to a portfolio, especially as it shows very low correlation to the broader equities market and the economy in general, said del Ama.

"The exploration and production of energy is a big area of growth in the U.S.," he said, adding that the prospectiveness of the segment is also tied to the changing landscape on the transportation of that energy, thanks to government focus on U.S. energy independence.

Tracking Error An Issue

But the attractions aren't without pitfalls. MLP-based ETFs can be a tax headache to investors. Unlike most other ETFs, MLP-based ETFs such as MLPA and AMLP are, in fact, taxed as corporations, which puts them at risk for double taxation.

Even as distributions to investors in many cases are deemed nontaxable return of capital, the complex tax structure could affect overall returns and cause the fund's performance to diverge from its index.

AMLP's performance in 2011 exemplified this issue. The fund ended the year with a tracking error that neared 7 percent, the highest in a pool of more than 700 ETFs surveyed by Morgan Stanley.

"There will be a significant additional tracking error in these types of funds," del Ama conceded, saying that there's no way of avoiding the tax hurdle because ETFs have to fit in the rules set by the Investment Act of 1940, which makes these types of funds corporations.

"But the dividends paid out by an ETF are still more tax efficient than they are through ETNs,' he added.

Crowding Space

MLPA's launch will come only a month after New York-based asset manager Yorkville rolled out the Yorkville High Income MLP ETF (NYSEArca:YMLP), which costs 0.82 percent.

YMLP, however, serves up a commodities-based MLP portfolio that offers little, if any, overlap to broader infrastructure-focused exposure such as AMLP's.

Other strategies in the space include a group of ETNs such as the Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca:MLPY), which focuses on energy transportation MLPs, as well as the Credit Suisse Cushing 30 MLP ETN (NYSEArca:MLPN).

UBS also sponsors a roster of E-Tracs MLP ETNs that serve up narrowly focused portfolios as well as leveraged and inverse plays.

Global X also has another MLP-focused ETF currently sitting in the regulatory pipeline that would hone in on natural gas MLPs.

The Global X MLP Natural Gas ETF (NYSEArca:MLPZ) will be a sector MLP fund through a portfolio that is essentially a subset of MLPA. MLPZ will cost 0.58 percent, the company said in the same filing detailing MLPA. The fund will also track a Solactive Index, but consist of some 20 MLPs involved with the exploration, production and marketing of natural gas.

It's not clear when MLPZ will come to market, but recent regulatory paperwork filed by Global X suggests a launch could be imminent.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: AMJ , AMLP , MLPN , MLPY

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