ETF Trends
ETF Trends

Active management is taking considerable flack and it is easy to understand why.

“Eight out of 10 U.S. stock funds focusing on large growth companies are trailing their benchmark index, the second-highest proportion in a decade,” report Inyoung Hwang and Lu Wang for Bloomberg, citing Morningstar data. [S&P 500 ETFs Crush Active Mutual Funds]

Add to that, Bank of America said on Monday that just one of every five active managers have topped the broader market for the 12 months ended October. Managers largely missed the blue-chip rally this year, and active funds compounded their poor stock picks during last month’s bout of volatility. Consequently, the largest active fund managers have been losing market share to low-cost, beta-index trackers and ETFs. [Lagging Active Funds Increase the Allure of Passive ETFs]

However, there are asset classes where active management does work. Master limited partnerships (MLPs) and at least one relevant exchange traded funds are proving to be one of those groups. In fact, the actively managed First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) is up nearly 22% this year, making it 2014’s top-performing energy ETF, according to Dorsey Wright data.

That performance is impressive, but EMLP offers investors another reason to embrace active management of MLPs. Hybrid MLP ETFs, of which EMLP is one, or non-C-corporation MLP ETFs, have reduced direct MLP holdings to under 25% to meet regulatory rules and hold other energy infrastructure stock  through subsidiaries as a way to avoid double taxation. [Hybrid MLP ETFs Outperform]

Said another way, EMLP’s annual fee of 0.95% is high relative to a passively managed ETF, but some of EMLP’s rivals do not limit MLP holdings to 25%, subjecting investors to increased taxation and astronomical total cost ownership.

EMLP, which has a 12-month distribution yield of 3.1%, allocates a combined 14.4% of its weight to Kinder Morgan Management (NYSE: KMR), Williams Cos (NYSE: WMB) and Kinder Morgan (NYSE: KMI), meaning the ETF has enjoyed significant leverage to the raft of consolidation that has taken place in the MLP space this year.

Nearly 37.5% of EMLP’s weight is allocated to utilities, which has been a boon for the ETF in a year in which that sector has surged. Although MLPs and utilities are viewed as rate-sensitive asset classes, that does not mean if rates rise, EMLP is destined to be a laggard.

Since 2000, yields on benchmark 10-year Treasuries finished higher in five calendar years. Meanwhile, the Alerian MLP Index posted positive returns in each of those five years – 2003, 2005, 2006, 2009 and 2013.

Investors clearly like EMLP’s story. The ETF now has $939.4 million in assets under management of which over $380 million has come into the fund this year.

First Trust North American Energy Infrastructure Fund