MLPL: Juicing the Yield to 12.9%

July 7, 2010 by  
Filed under Commentary, ETF IPOs (New ETFs), ETNs

The UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) was listed for trading July 7, 2010. This is the second product UBS has introduced on the same underlying index. The first was launched back on the first day of April and is the unleveraged version: UBS E-TRACS Alerian MLP Infrastructure Index (MLPI).

The new MLPL ETN is designed to track a leveraged investment (reset monthly) in the Alerian MLP Infrastructure Index. It will pay a variable quarterly coupon linked to the leveraged cash distributions associated with the underlying MLP constituents, less financing costs and investor fees. The underlying index is comprised of 25 energy infrastructure Master Limited Partnerships that generally earn the majority of their cash flow from the transportation and storage of energy commodities.

According to the MLPL fact sheet, the current underlying yield of 6.87% will also be leveraged up. After subtracting out the 0.85% fee (expense ratio), the ETN is expected to have a net current yield of 12.89%.

However, yield chasers need to be warned: the extremely high yield comes at a price. That price being twice the volatility and about twice the drawdown. No information is provided on the risk characteristics of the leveraged index, but the unleveraged one appears to have undergone a larger than -50% decline in the 2008-2009 bear market. The monthly reset might mitigate the impact somewhat, but I would expect a leveraged version would have had a -80% to -90% drawdown during that period.

The introduction of the MLP “asset class” to ETF/ETN investors over the past year has been a huge success. The JPMorgan Alerian MLP ETN (AMJ) launched last year attracted significant investor interest, and this year it attracted competition. UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI) and Credit Suisse Cushing 30 MLP Index ETN (MLPN) started trading in April, and both ALPS and Van Eck have filed for ETF versions.

Risks aside, I believe the leveraged yield of MLPL will be too hard for yield-starved investors to ignore and will lead to significant inflows for UBS.

MLPL prospectus

Find analysis of all new ETFs & ETNs here.

Disclosure covering writer, editor, and publisher: Long AMJ. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Comments

Comments are closed.