Although the asset class is believed to have some sensitivity to rising Treasury yields, master limited partnerships are still prized by income investors. Interest rates that are still low by historical standards and robust yields help the cause.
Exchange traded products issuers have seized on the demand for MLPs in the ETF or ETN wrappers. Six such products debuted last year. One has already launched this year: The Direxion Zacks MLP High Income Shares (NYSEArca: ZMLP).
ZMLP tracks the Zacks MLP Index “which is composed of approximately 25 master limited partnerships (MLPs) listed on North American stock exchanges. The index’s holdings are selected using a quantitative, rules-based methodology developed by Zacks to eliminate MLPs with insufficient share prices, market capitalizations and liquidity. All companies in the index are equally weighted so that each holding constitutes 4 percent of the ETF’s portfolio, which is rebalanced on a quarterly basis,” according to a statement.
At the end of last year, the index sported a dividend yield of 7% and held 25 MLPs with an average market value of $5.42 billion, according to Direxion. Top-10 holdings in the index include Hi-Crush Partners (NYSE: HCLP), Alon USA Partners (NYSE: ALDW), Linn Energy (NasdaqGM: LINE) and Energy Transfer Partners (NYSE: ETP).
ZMLP fits with Direxion’s plans of bolstering its lineup of traditional funds. The firm is the second-largest issuer of inverse and leveraged ETFs, but offers plain vanilla fare such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSE: QQQE).
Some MLP ETFs, including ZMLP, are structured as C-Corporations. Due to the C-Corp structure, they must pay corporate income tax on distributions before passing them to investors. Consequently, MLP ETFs may incur higher fees that would cut into overall performance, leading to an underperformance compared to the underlying benchmark. [MLP ETFs Capture U.S. Energy Boom]
ZMLP has an annual expense ratio of 0.65%.
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.