Portfolio Construction: Where Do Sector ETFs Fit? | ETF Trends

ETF investors can look to areas of the energy supply chain, materials, utilities and transportation sectors as a way to help potentially enhance yield generation and diversify portfolio risks.

On the upcoming webcast, Portfolio Construction: Where Do Sector ETFs Fit?, Todd Sunderland, Partner, Head of Risk Management, Head of Quant Strategies, Cushing Asset Management, will weigh in on how income-minded investors interested in the potential growth opportunity of the rebounding energy segment can consider sector-specific strategies to gain targeted exposure to market segments.

For example, Cushing has recently come out with a handful of its own master limited partnership-related ETFs, including the Cushing Utility & MLP ETF (XLUY), Cushing Energy & MLP ETF (XLEY), Cushing Energy Supply Chain & MLP ETF (XLSY) and Cushing Transportation & MLP ETF (XLTY).

“Yield weighting sector constituents and adding MLPs is designed to maintains sector exposure while increasing the focus on yield rather than market capitalization or share price. Limiting the constituent and MLP exposure aims to keep concentration in check while focusing on yield,” according to Cushing.

To improve tax efficiency, these MLP-related ETFs limit exposure to MLPs to 24% at each quarterly rebalance. Traditional MLP funds that hold more than 25% of their portfolios in MLPs are structured as C-Corporations and must pay corporate income tax on distributions before passing them on to investors, which incurs additional tax headaches come tax season that translates to lower overall returns.

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The Cushing MLP ETFs include exposure to other mid-stream companies on top of traditional MLP exposures. Specifically, XLEY includes energy sector names taken from the S&P 500 Energy Index. XLSY includes components from the S&P 500 Energy and S&P 500 Materials Indices. XLTY incorporates holdings from the Dow Jones Transportation Average. Lastly, XLUY includes S&P 500 Utility Index components. The ETFs also have a focus on income generation with components reweighted by their yield.

“Cushing ETFs seek to provide investors with sector exposure by seeking to replicate the performance of corresponding Cushing Indices. The energy, utility, transportation, and energy supply chain indices are sector oriented with a custom yield weighing methodology and include master limited partnerships (MLPs), which is designed to add an income focus and diversification while maintaining the overall sector attributes,” according to Cushing.

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