A little more than three months ago, at the end of March, only one exchange-traded product (ETP) focused on Master Limited Partnerships, or MLPs. Now, with yesterday’s (7/14/10) introduction of UBS E-TRACS Alerian Natural Gas MLP Index ETN (MLPG), there are five such products. A 400% increase in “selection” in less than four months, and more MLP products in the filing pipeline. Are we getting frothy yet?
The attraction is easy to see. Most MLP indexes are yielding north of 6% while 5-year Treasury securities yield less than 2%. The current yield on the SPDR S&P 500 (SPY) is about 2% also, and you have to wait a long time to get paid. Additionally, the MLP indexes have been less volatile than the stock market in recent months.
Income investors are starving for yield. MLPs, and their associated ETNs, look like an attractive alternative. As a result, assets have been moving in and will continue to do so. At some point it will become overdone – a little MLP bubble will occur. I’m not sure when that day will arrive, but when your parents or your kids start to ask you about them, you’ll know we are getting close. Until then, enjoy the ride.
The new MLPG ETN is different from the other products, focusing on just the natural gas infrastructure sub-segment of Master Limited Partnerships (MLPs). It is comprised of the 15 largest capitalization MLPs in this group. The holdings are equally weighted at the time of rebalancing, with the largest currently Copano Energy LLC (CPNO) 7.0%, Spectra Energy Partners LP (SEP) 6.9%, Targa Resources Partners LP (NGLS) 6.8%, Duncan Energy Partners LP (DEP) 6.8%, and Boardwalk Pipeline Partners (BWP) 6.7%. Complete list of index constituents here (pdf).
The underlying Alerian Natural Gas MLP Index has a current yield of 6.56%. According to the MLPG fact sheet (pdf), the ETN has a yearly fee (expense ratio) of 0.85%, placing the expected net yield at about 5.7%
Like all MLP exchange-traded products on the market today, MLPG is packaged as exchange-traded notes (ETNs), which are unsecured debt obligations. Therefore, when evaluating the risks of MLPG, you should also include the creditworthiness of the issuer – UBS. One advantage of the ETN packaging comes at tax time when you receive a standard 1099 form instead of the more complicated K-1 and special rules governing the taxation of MLP distributions.
If you are considering an MLP ETN, here is a quick summary of the five products currently listed for trading:
- JPMorgan Alerian MLP ETN (AMJ) launched more than a year ago and is the largest and most liquid. It covers the entire MLP sector using a cap-weighted methodology of the 50 largest MLPs.
- UBS E-TRACS Alerian MLP Infrastructure Index (MLPI), launched in April 2010, covers the “infrastructure component” of the sector where each of its constituents generate at least 50% of their earnings from assets that are not directly exposed to changes in commodity prices. It employs a multi-tier capped weighting process with the largest of the 25 holdings capped at 9.5%, followed by additional caps at 7.0% and 4.7%.
- Credit Suisse Cushing 30 MLP Index ETN (MLPN), launched in April 2010, tracks an equal-weighted index comprised of 30 publicly traded stocks in the North American energy infrastructure niche, primarily midstream energy assets.
- UBS E-TRACS 2x Alerian MLP Infrastructure Index ETN (MLPL) was listed for trading last week on July 7, 2010. It tracks the same index as MLPI but with 2x leverage juicing its yield to 12.9%.
- UBS E-TRACS Alerian Natural Gas MLP Index ETN (MLPG) (the main focus of this article) was listed on July 14, 2010. It tracks an equally weighted index of 15 MLPs in the natural gas infrastructure sub-segment.