With the conclusion of the U.S. presidential election, a major
hurdle of uncertainty is over for the stock markets and finally
it seems now we can have some fundamental catalysts driving the
market movements.
Unfortunately, it hasn't exactly been a bull market since
Obama won a second term, as the S&P 500 has slipped and is
now heading into bear territory having breached the crucial 1400
level.
Clearly, the positive bias in the market (which was persistent
through a major part of fiscal 2012) seems to be over and the
markets presently are concentrating on big events such as the '
Fiscal Cliff'
(read
Volatility ETFs Winning on Fiscal Cliff
Turmoil
).
The induced fear of the Cliff among investors has led to sharp
selling pressure in the market as worries build over taxes. In
fact, rates could go up across the board with capital gains taxes
and dividend rates jumping to levels unseen in at least a
decade.
This is especially bad news for income seeking investors who
have already seen a rough past few years. If the paltry yields on
fixed income securities were not enough, now they have to deal
with added tax burdens on dividends, due to the Fiscal Cliff.
Thanks to this, investors have been liquidating their investments
as an attempt to be taxed at current rates and then (perhaps) buy
back again once they have clarity over issues pertaining to the
Cliff.
From the ETF space, the MLP ETF segment seems to have been on
the wrong side of this fear induced correction as the
ETFs
in this space are among the biggest losers in this post-election
sell off. Although it must be said that this slice of the market
had been enjoying a decent run this year, at least until the
election results were out (see
Do Country ETFs Really Provide
Diversification?
).
The following table highlights certain ETFs from the MLP
segment and analyzes their performance in this fiscal year:
|
ETF
|
Post-Election Returns
|
Pre-Election YTD Returns
|
YTD Returns
|
Yield
|
Total Assets
|
Expense Ratio
|
|
AMLP
|
-5.75%
|
0.42%
|
-5.35%
|
6.01%
|
$4.24 billion
|
0.85%
|
|
MLPA
|
-7.40%
|
1.26%
|
-6.23%
|
6.67%
|
$15.04 million
|
0.45%
|
|
YMLP
|
-11.59%
|
-3.07%
|
-14.31%
|
7.61%
|
$80.39 million
|
0.82%
|
Note: YTD Returns for MLPA and YMLP are Since Inception
Returns
Traditionally, MLP ETFs are known to be stable investment
avenues primarily offering high and steady cash flow streams to
investors in the form of high yields. However, they are known to
offer little in terms of capital appreciation. That is the reason
why we see the pre-election YTD returns are almost flat.
However, these ETFs were massively hit by the post-election
sell offs. One reason could be the investors' perception about
the extremely high dividend taxation of these high yielding ETFs
if we fall off the Cliff.
The table also suggests another very interesting fact. The
post-election sell offs are highest for ETFs having higher
yields. This suggests that the fact that the bearish momentum in
the MLP ETF segment is actually a fear of paying higher taxes on
higher yields (although the sample size is relatively small).
However, having a closer look at the true picture reveals a
different story. MLPs distribute 90% of their income to their
partners (i.e. investors) in order to avoid state and central
level corporate tax, just like Real Estate Investment Trusts
(REITs) (read
HYEM: The Best Choice in Junk Bond ETFs?
).
However, these distributions are not accountable to be taxed
as and when the distributions are made, but are deferred until
investment in them are liquidated. Thus form an investor point of
view it in some ways gives them a head start on the tax front.
Although, when the positions are liquidated the distributions are
also taken into account and are taxed as capital gains (see more
in the
Zacks ETF Center
).
While at the initial thought this may not seem like much of an
advantage over other high yielding avenues, however, this
deferral of tax might go a long way in serving the purpose of
investors seeking high levels of current income while holding on
to their investments in these volatile markets.
Unfortunately, the bearish momentum in the markets arising out
of the fiscal cliff is treating MLP ETFs like other dividend
paying avenues, however, with the passage of time as things get
clearer a rally in the MLP segment seems more than evident. Also,
needless to say their high yields over other dividend yielding
instruments is an added advantage in this low interest rate
scenario (read
Long Term Treasury ETFs: Ultimate QE3 Play?
).
So, is this sell off in the MLP ETF segment a result of the
negative bias in the broader markets? Will the income seeking
investors restore their confidence in this intriguing slice of
the market? Or do the investors foresee a radical fundamental
shift in this space that will tank it further?
While it is pretty difficult to answer these questions at this
present moment, one thing is pretty sure; MLP ETFs will remain an
excellent source for income seeking investors who chose to ride
out the market volatility while enjoying a steady stream of cash
flow.
Just be careful with this space as more fiscal cliff issues
come out, or if any other tax changes are proposed. Clearly, this
space can be more impacted than most by proposed changes and they
need to be monitored closely during these types of
environments.
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ALERIAN-MLP (AMLP): ETF Research Reports
GLBL-X MLP ETF (MLPA): ETF Research Reports
YORKVL-HI MLP (YMLP): ETF Research Reports
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