In more sanguine times, master limited partnerships were one of the most beloved asset classes by income investors. The popularity of MLPs and MLP exchange-traded funds soared in the years after the global financial crisis and prior to the start of oil’s bear market last year.
Currently, there are roughly 25 MLP ETFs trading in the U.S. and using assets under management as the superficial barometer for ETF success, and it is accurate to say more than half of these are successes. U.S. MLP ETFs have over $25 billion in combined assets under management.
However, being popular has not insulated MLPs from tumbling oil prices. Of the 25 worst-performing non-leveraged exchange-traded products over the past six months, eight (about a third) are MLP ETFs.
Despite those gloomy tidings, all is not lost for MLP ETF investors. In fact, the recent swoon experienced by MLPs has a silver lining: It is helping income investors identify the strongest MLP ETFs for the long-term.
Which includes the following.
First Trust North American Energy Infrastructure Fund (EMLP)
The First Trust North American Energy Infrastructure Fund (EMLP) is home to $919 million in assets under management, making this MLP ETF the third-largest actively managed ETF of any type and the largest active equity-based ETF.
As an active fund, EMLP is pricey compared to traditional index-based ETFs, charging 0.95% per year, or $95 for every $10,000 invested. However, that is still well below the average expense ratio of 1.76% for MLP ETFs.
Active management has some advantages in the case of EMLP: Despite losses of 19% over the past six months, that’s still better than many of the worst MLP offenders.
With a trailing 12-month distribution rate of 4.1%, EMLP’s yield looks low compared to the 7% to 8% or more found on some MLP ETFs, but there is a sound reason behind this. EMLP is not a pure MLP ETF. The fund also holds “MLP affiliates, Canadian income trusts and their successor companies, pipeline companies, utilities and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries,” according to First Trust.
Familiar names in this MLP ETF include Kinder Morgan (KMI), Enterprise Products Partners (EPD) and NextEra Energy (NEE).
Global X MLP & Energy Infrastructure ETF (MLPX)
Like the aforementioned EMLP, the Global X MLP & Energy Infrastructure ETF (MLPX) is a hybrid MLP ETF, and that’s important come tax time. This is because mutual funds and ETFs (including traditional MLP ETFs) are structured as corporations, which according to ETF Trends is why, “… MLP funds are required to pay corporate taxes or a 35% federal rate on returns. Fund investors are also taxed on the fund dividends and capital-gains distributions.”
By not being a 100% pure MLP ETF, MLPX removes the potential burden of too much taxation. Consequently, that also means that this MLP ETF can only hold a quarter of its weight in true MLPs. So don’t be surprised when you see refiners such as Marathon Petroleum (MPC) and Phillips 66 (PSX) among MLPX’s nearly 40 holdings.
Its lack of pure MLP exposure gives MLPX a trailing 12-month yield of 3.8%, which is more in line with what investors will find on a utilities ETF, but that is still 180 basis points better than the yield on 10-year T-Note.
What’s more, MLPX is cost-efficient relative to the average MLP ETF, at just 0.45% per year.
As of this writing, Todd Shriber was long KMI.
