As an alternative to typical dividend yielding stocks, exchange traded funds that that track master limited partnerships provide an another option for investors who want their investment portfolios to generate income.
Investors are also drawn to MLPs for their diversification properties because they tend to move independently of other asset classes such as stocks, bonds and commodities.
MLPs are a type of publicly traded limited partnership. As a limited partner, a person provides capital, and in return, receives a periodic pay out from the the company’s revenue. Additionally, for MLPs to be classified as a partnership, the majority, or about 90%, of the MLP’s revenue needs to come from real estate, natural resources and commodities, and the majority operate in the energy infrastructure business.
ETFs that track the space typically cover natural gas and crude oil pipeline operators. Potential investors should note that their revenue is only indirectly tied to the underlying commodity prices, as they generate their cash from the amount of volume moved through their the MLP’s facilities.
MLP-related funds come in both ETFs and exchange traded notes. Stoyan Bojinov at ETFdb notes that ETNs may provide a more favorable tax treatment if the underlying fund components appreciate in value. While ETNs diminish potential tracking errors, the notes are unsecured debt obligations, which may expose investors to potential credit risks from the issuer. The ETF structure provide more favorable tax treatments on yields.
MLP ETNs include:
- JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), with almost $4.4 billion in assets, is the most popular MLP fund. JP Morgan recently announced that a cap on AMJ’s outstanding shares, which could lead to a premium in this ETN’s price if demand rises too quickly. AMJ has an expense ratio of 0.85% and a 5.38% yield. [Cap in Master Limited Partnership ETN May Trigger Premium]
- Credit Suisse Cushing 30 MLP Index ETN (NYSEArca: MLPN) follows an equal weighted index that utilizes its own proprietary methodology for selecting funds. MLPN has an expense ratio of 0.85% and a 5.84% yield.
- Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY) tracks a dividend-weighted index of 30 MLPs that are engaged in the energy infrastructure and related shipping assets in North America. MLPY has an expense ratio of 0.85% and a 7.34% yield.
- UBS E-TRACS Alerian MLP Infrastructure Index (NYSEArca: MLPI) tries to reflect the Alerian MLP Infrastructure Index. MLP has an expense ratio of 0.85% and a 5.17% yield.
- UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (NYSEArca: MLPL) tries to provide the 2x monthly leveraged exposure to the Alerian MLP Infrastructure Index. MLPL has a 0.85% expense ratio and a 11.3% yield. As a leveraged product, the fund should not be held for long periods but rather used as a hedging tool.
- UBS E-TRACS Wells Fargo MLP Index (NYSEArca: MLPW) tries to track the Wells Fargo Master Limited Partnership Index. MLPW has an expense ratio of 0.85% and a 5.22% yield.
- UBS E-TRACS Alerian Natural Gas MLP Index (NYSEArca: MLPG) offers exposure to companies that generate the majority of their revenues from the transportation, storage, and processing of natural gas and natural gas liquids. MLPG has an expense ratio of 0.85% and a 5.74% yield.
MLP ETFs include:
- ALPS Alerian MLP ETF (NYSEArca: AMLP) is the largest MLP ETF at $3.2 billion in assets. The fund tries to reflect the performance of the Alerian MLP Infrastructure Index. AMLP has a 0.85% expense ratio and a 6.35% yield.
- Exchange Traded Concepts Yorkville High Income MLP ETF (NYSEArca: YMLP) includes royalty trusts, energy firms, companies involved in marine transportation and the production and marketing of other natural resources including timber and fertilizers. YMLP has a 0.82% expense ratio and a 8.78% yield.
- First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) is an actively managed ETF that holds Canadian income trusts, pipeline companies, MLPs and utilities that generate at least half of their revenues from infrastructure assets such as pipelines and power transmission. EMLP has a 0.95% expense ratio. The fund started trading on June 20. [First Trust Introduces Active MLP ETF]
- Global X MLP ETF (NYSEArca: MLPA) tries to reflect the performance of the Solactive MLP Composite Index. MLPA has a 0.45% expense ratio and a 6.31% 30-day SEC yield.
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.