It’s no secret that I’m gaga for master limited partnerships. Their powerful combination of steady cash flows, high tax-deferred distributions and capital appreciation makes them one of my top picks for portfolios in 2013 and beyond.
My opinions notwithstanding, investors continue to be driven toward the sector as they search for yield in our current zero-interest rate environment. And as retail investors have increasingly come calling, Wall Street has answered — there are now 11 different exchange-traded products (not to mention the numerous mutual and closed-end funds) that track the sector.
Well, you can tack on two more. New product launches from providers Global X and Barclays (NYSE:BCS) will bring the MLP ETF count up to 13.
But given the plethora of funds tracking the master limited partnership sector — with some having accumulated billions in assets — are these ETFs bringing anything new to the table?
MLPJ: A Small-Cap Focus
Global X’s new Junior MLP ETF (NYSE:MLPJ) is the first fund to offer outright exposure to small-cap master limited partnerships. Currently, all the products in the sector center their attention on the big boys like Kinder Morgan (NYSE:KMP) — including another Global X product, the Global X MLP ETF (NYSE:MLPA).
The Junior MLP fund tracks a new index from Solactive that will own energy MLPs with market caps ranging from $226 million to $2.3 billion.
Notice, I said energy … not midstream.
Typically, when investors think about MLPs, a firm that owns pipelines, storage and various gathering assets is the first thing that pops into their heads. These firms act like toll roads and collect steady, long-term fees based on the amount of product flowing through their systems. For most investors, that’s what they’re looking for in an MLPs — steady and growing cash payments.
However, roughly 44% of the holdings in the Solactive Junior MLP Index are small exploration and production companies, 13% are refiners and three are coal miners. These are very different animals than traditional pipeline partnerships and carry significant commodity price exposure — unlike the pipeline players. These variable distribution MLPs generally base their dividends on what they produce and at what price. Coal having a bad year? Expect your miner MLP to reflect that in its distributions. In fact, both Dorchester Minerals (NASDAQ:DMLP) and Eagle Rock Energy Partners (NASDAQ:EROC) — two MLPJ holdings — have cut distributions over the past five years. There are plenty of other examples of variable distribution MLPs cutting their dividends as well.
Nonetheless, that variability does provide some benefits — like a bigger yield. The index on which MLPJ is based currently has a distribution yield of around 9%. That’s pretty hefty, and about 3% more than other MLP sector measures focusing on midstream firms. Investors just need to understand where that yield is coming from and not be blinded by the high number.
Global X will charge 0.75% in expenses for MLPJ.
IMLP: S&P’s Chance to Shine
The other new MLP-based fund comes from Barclays’ successful iPath line of exchange-traded notes.
The new iPath S&P MLP ETN (NYSE:IMLP) will track an MLP index designed by Standard & Poor’s. The index is designed to provide exposure to leading partnerships that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. It includes both master limited partnerships and publicly traded limited liability companies (LLCs) — which basically are MLPs and share the same tax benefits — such as Linn Energy (NASDAQ:LINE). The index also has portfolio weighting stipulations so that no single MLP can account for more than 15% of the benchmark.
Digging into the ETN, you have a fund that tracks 56 of the largest MLPs, firmly focused on the midstream sector. Top holdings include the usual suspects like Enterprise Product Partners (NYSE:EPD), Kinder Morgan and Plains All American Pipeline (NYSE:PAA).
This large-cap MLP exposure echoes other popular funds like the $4.6 billion Alerian MLP ETF (NYSE:AMLP), so IMLP doesn’t necessarily add anything new to the mix. However, it does provide that similar exposure at a cheap price. Expenses for IMLP run 0.8%, while most of its larger rivals charge around 0.85%. That could give it the edge in the long run.
Only time will tell whether IMLP gets enough liquidity or assets to make it a viable portfolio option. In the meantime, investors might want to stick with the other more established ETFs/ETNs in the space.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.