Although equities have had a strong run so far this year, oil
prices have not kept up the pace. Crude oil remains stubbornly
around the low to mid $90/bbl level in WTI terms, and shows no
sign of breaking out in the near future thanks to a strong
While this situation certainly had a negative impact on
commodity investments, it hasn't been terrible news for the MLP
ETF space (read:
Time to Sell This Commodity ETF?
have had an excellent start this year and led the way higher in
the traditional energy space, encouraging many investors to
consider this often overlooked asset class.
What are MLPs?
MLPs, or Master Limited Partnerships, are publically traded
partnerships that are generally engaged in the transportation,
storage, production, or mining of minerals and natural
They are relative safe and less risky than other plays in the
broader energy space.
This safety stems from the 'toll way' models of these
businesses, as MLPs often operate pipelines or similar energy
assets that ferry oil, natural gas, and other products across the
landscape. The firms in this space are not affected by the
changes in oil and natural gas prices, thereby having stable
3 Commodity ETFs Still Going Higher
Beyond this stability, yields are also pretty high thanks to
some favorable tax rules-like what you see in the REIT space--
that push firms in the MLP space to pay out substantially all of
their income to investors on a regular basis. This results in
more than 90% of income going out to partners in order to avoid
the issue of corporate taxation.
In addition to high yield and the potential for capital
appreciation, MLPs also have lower volatility and provide
diversification benefits to the portfolio (read:
3 Excellent ETFs for Income Investors
MLP ETFs/ETNs in Focus
MLP ETFs and ETNs have been extremely popular in recent years
thanks to increased interest in energy investing and a high
payout potential. A host of new products have been introduced in
the space this year such as Barclays ETN+ Select MLP ETN (
), Yorkville High Income Infrastructure MLP ETF (
), Global X Junior MLP ETF (
) and iPath S&P MLP ETN (
), nearly all of which have seen tremendous inflows in the short
time these have been on the market.
This is because investors continue to pour assets into a
segment that promises solid income potential at a time when many
bond yields look paltry and bond prices look stretched (read:
Time for Inverse Bond ETFs?
Yet, unfortunately, there are still some tax headaches when
using the MLP structure, namely the possible need for a K-1 form
at tax time. However, there could be a way to avoid this issue by
looking to MLPs that use an exchange-traded structure. While some
MLP ETFs still face the K-1 issue at tax time, those that utilize
an ETN structure will not.
ETNs do not actually hold the securities of an underlying
index. Instead, an ETN is an unsubordinated debt security that
promises to pay out a return that is equal to an index. This is
completely unlike an ETF which buys and sells the securities that
make up a particular benchmark.
Due to this advantage, investors can buy MLPs without the
hassle of K-1s at tax time, making MLP ETNs an excellent choice
for those looking for exposure to the high yield segment without
the taxation headaches (read:
No Dividend Tax Debate for these High Yield
For these investors, we have highlighted a handful of MLP ETNs
below, any of which could make for quality picks that still avoid
some of the key issues that plague not only general MLP
investments, but MLP ETFs as well:
JPMorgan Alerian MLP Index ETN (
Launched in April 2009, this is by far the most popular and
the largest ETN in the MLP space with AUM of roughly $5.7 billion
and average daily volume of more than 1.3 million shares.
With holdings of 50 securities, the product provides exposure
to midstream energy MLPs and tracks the Alerian MLP Index. The
note puts more than 60% in the top 10 holdings, suggesting heavy
concentration across individuals (see more in the
Enterprise Products Partners takes the top spot with 15.46%
share alone, while the next two spots - Kinder Morgan Energy
Partners and Plains All American Pipeline - together make up for
16.27% of the assets. From a market cap look, large caps account
for 55%, while mid caps (27%) and small/micro (18%) also receive
The ETN charges investors 85 basis points a year in fees for
its services and is one of the strong performers in the MLP
space. AMJ gained about 18.7% year-to-date and its yield comes in
at a robust 3.43%, suggesting that it could be a decent source of
Two Unconventional Sources of ETF Yield
Morgan Stanley Cushing MLP High Income Index ETN
Although this note suffers from low volume - and thus wide bid
ask spreads - it could be an interesting yield destination for
those looking for more exposure to the MLP space. The product
tracks the Cushing MLP High Income Index, holdings 30 energy and
shipping focused firms based in North America.
Exposure is well diversified across the group, as no single
company makes up more than 5.5% of the assets. VR Partners,
Energy Transfer Partners and Buckeye Partners occupy the top
three positions in the basket. Still, investors should note that
this is a small cap centric product with roughly half of the
assets going to this cap level.
This product results in an excellent yield of over 6.9%, while
fees are like other MLP ETNs at 85 basis points a year (read:
Red Hot Dividend ETFs
). With AUM of just $21.5 million, MLPY is another solid
performer in the space this year, surging 11.1% year-to-date.
UBS ETRACS Alerian Natural Gas MLP Index ETN (
For focus on the natural gas corner of the MLP world,
investors have MLPG, a relatively less popular note from UBS. The
product has amassed only $30 million in AUM and trades in small
volumes resulting in increased cost in the form of a wide bid/ask
The note seeks to match the performance of the Alerian Natural
Gas MLP Index and pays a variable quarterly coupon, net of fees
and expenses. This benchmark consists of firms that generally
earn the majority of their cash flow from the transportation,
storage, and processing of natural gas and natural gas liquids
and comprises 20 stocks in total (read:
Natural Gas ETFs Soaring in 2013
Investors should note that mid cap securities consist of half
of the portfolio, with small caps (35%) comprising much of the
rest. In terms of individual holdings, the product is equally
concentrated across its individual securities. Access Midstream
Partners, Atlas Pipeline Partners and Boardwalk Pipeline Partners
take the top three spots in the basket.
Fees for this note also come in at 85 basis points a year,
although the yield is rather robust at roughly 5.28% per annum.
The ETN added 13.7% so far in the year, putting it in the middle
of road on this list.
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JPM-ALERN MLP (AMJ): ETF Research Reports
BARCLY-SLCT MLP (ATMP): ETF Research Reports
IPATH-SP MLP (IMLP): ETF Research Reports
E-TRC UBS AL NG (MLPG): ETF Research Reports
GLBL-X JR MLP (MLPJ): ETF Research Reports
MS-CUSH MLP HI (MLPY): ETF Research Reports
YORKVL-HI IN ML (YMLI): ETF Research Reports
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