YMLP: Another Abomination of the ETF Wrapper
There are 1,441 ETFs and ETNs listed for trading today. 1,439 of them are not structured as C-corporations and, therefore, generally not liable for any federal or state taxes. The other two ETFs do have a C-corporation structure, which is costing their shareholders millions of dollars (more than $122 million as of 3/22/12). Furthermore, I’m of the opinion these two abominations are not doing enough to make shareholders aware of the negative ramifications of this structure.
Yorkville High Income MLP (YMLP) began trading 3/13/12, doubling the quantity of C-corporation ETFs from one to two. The first ETF to saddle shareholders with fund-level tax liabilities was the Alerian MLP ETF (AMLP). According to Alerian, MLPs packaged inside an ETF had long eluded many financial institutions that had “been trying for years to unlock the secret to an [MLP] ETF.” AMLP’s Dirty Little Secret is that it clips about 37.5% off daily index changes to determine the fund’s NAV. Said another way, AMLP’s NAV is calculated with a 62.5% leverage factor.
You don’t have to take my word for it, the AMLP 12/31/11 performance report (pdf) shows the fund reduced the 2011 return of the underlying index by 40.9% (10.04% versus 16.99%) while claiming a “total” expense ratio of only 0.85%. Simple math would suggest the expense ratio for 2011 was closer to 7%.
Regulators have apparently allowed AMLP to operate without any significant changes to its disclosures. As a result, it has attracted nearly $3 billion in assets and now Yorkville High Income MLP (YMLP) is following AMLP’s footsteps. According to a footnote in the YMLP prospectus (pdf), “the Fund’s accrued deferred tax liability will be reflected each day in the Fund’s net asset value per share.” However, the claimed “total expense ratio” of 0.82% makes no provisions for the tax liabilities incurred by YMLP.
Yorkville utilized Exchange Traded Concept’s ETF-In-A-Box solution to bring YMLP to market quickly and efficiently. The underlying Solactive High Income MLP Index is a rules-based benchmark currently targeting 25 MLPs with the highest distributions. The Index yield is about 8.7%. However, fund level yield has not been determined and the impact of fund level tax liabilities is unknown but expected to be small.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. 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.