A Low-Cost ETF for Playing Energy MLPs

by Kyle Woodley | April 24, 2012 11:33 am

Some of the heaviest-hitting income plays can be found in just three letters: MLP.

Master limited partnerships[1] are publicly traded limited partnerships, set up as tax-beneficial corporate structures that allow for so-called pass-through income — making them popular investments for those seeking large, regular distributions.

Although they can deal in commodities and real estate, most MLPs focus on the energy sector, representing various stages in the process, including refining, exploration, production and transportation. And considering the growing role North America is playing as an energy supplier[2], a number of MLPs stand to benefit.

Which, according to Global X CEO and Portfolio Manager Bruno del Ama, is why his firm recently entered the MLP game with the Global X MLP ETF (NYSE:MLPA[3]), which went live last week[4].

“We see a lot of support to decrease the reliance from foreign energy sources to contain the price of gasoline and energy,” he said. “And thus you have energy become a source of growth in U.S. markets.”

Global X often is the first to the party when it comes to fund concepts, but MLPA actually joins a small field of competitors, including the Alerian MLP ETF (NYSE:AMLP[5]) and the Yorkville High Income MLP Exchange Traded Concepts (NYSE:YMLP[6]). So, rather than innovation, Global X’s selling point for MLPA is cost — specifically, a 0.45% expense fee vs. 0.85% for AMLP and 0.82% for YMLP.

“We’re a firm that focuses on innovative pieces of the capital markets, and a lot of our exposure is global and international and…expensive markets,” said del Ama. “[MLPA is] a fairly plain-vanilla U.S.-listed exposure, so from our perspective, we think that exposure can be listed much more cost-effectively.”

What investors gain is a convenient way to hold a diverse set of MLPs — rather than having to file individual K-1s for each of the 30 MLPs, they instead receive a 1099 form from Global X. The downside: Investors shoulder an additional tax burden they normally wouldn’t by holding the MLPs individually. However, the taxation does allow investors to buy into MLPs through their retirement plans.

“It is a less tax-efficient structure, but it’s a much simpler structure,” del Ama said. “And by adding the corporate structure into an MLP ETF and paying the taxes inside the ETF, you allow the 401(k) and IRA plans to invest in this asset class.”

Regardless of whether investors purchase energy MLPs individually or through MLPA, del Ama sees a number of upsides to the sector.

“First, it’s an exposure that has significant diversification of benefits relative to most asset classes. It also has low correlation to the S&P 500 and equity markets in general because of a lot of that toll-road type [income] you get by investing in these pipelines. As long as you have natural gas or oil flowing through those pipelines, you’re going to make a toll road-type revenue model.”

Del Ama notes that his fund leans a bit more toward the exploration and production and refining ends, but for the most part it’s fairly similar to the Alerian product. MLPA’s top holdings, each with weightings of 5% or more, include Magellan Midstream Partners LP (NYSE:MMP[7]), Plains All American Pipeline LP (NYSE:PAA[8]), Buckeye Partners LP (NYSE:BPL[9]), Enterprise Products Partners (NYSE:EPD[10]), Energy Transfer Partners LP (NYSE:ETP[11]) and Enbridge Energy Partners LP (NYSE:EEP[12]) — all names that yield between about 5% and 7%.

Global X isn’t allowed to predict what its yield might be, but the similarly constructed AMLP yields about 6%. MLPA’s advantage to investors, del Ama again points out, is having smaller fees taken out of the distribution check than its competitors.

“In essence, you get another 40 basis points of income that is not being deducted from what you receive from the MLPs,” he said.

Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley

  1. Master limited partnerships: http://investorplace.com/2012/01/master-limited-partnerships-mlp-tax-ki-irs/
  2. growing role North America is playing as an energy supplier: http://investorplace.com/2012/04/energy-independence-first-the-pipelines/
  3. MLPA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MLPA
  4. which went live last week: http://investorplace.com/2012/04/pipeline-profits-highlight-latest-batch-of-etfs-amlp-cemb-tchi/
  5. AMLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMLP
  6. YMLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=YMLP
  7. MMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMP
  8. PAA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PAA
  9. BPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=BPL
  10. EPD: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPD
  11. ETP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETP
  12. EEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEP

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