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