Exchange Traded Concepts Debuts Yorkville MLP ETF (YMLP) - ETF News And Commentary
March 13 2012 - 8:39AM
Zacks
Thanks to increased interest in energy investing and high
payouts, the MLP space has been extremely popular among ETF
investors. As a result, a number of issuers have sought to launch
new products in this segment, nearly all of which have seen
tremendous inflows in their short time on the market. The latest
company to try its luck in this space looks to be Yorkville which
is the first firm to use the turnkey service from Exchange-Traded
Concepts to bring its High Income MLP ETF (YMLP)
to market.
MLP Market
MLPs, or Master Limited partnerships, are publically traded
partnerships that are generally engaged in the transportation,
storage, production, or mining of minerals and natural resources.
Generally speaking, an MLP will consist of a general partner and
limited partners; general partners control the operations and
management while the limited partners provide capital and are
entitled to receive cash distributions. Obviously, investors in
this space act as ‘limited partners’ and do not engage in operation
and management of the assets (see Inside The Forgotten Energy
ETFs).
The benefit of this structure is that MLPs generally don’t pay
U.S. federal income taxes. This means MLP investors are generally
not subject to double taxation, a key feature of the product
structure. However, in order to qualify for this, MLPs must follow
Section 7704(d) of the IRS code which states that the partnership
must receive at least 90% of its income from qualifying sources.
Additionally, the partnership must pay out almost all cash flows to
holders as distributions, a stipulation which tends to make these
securities have outsized payouts when compared to their more
traditional peers.
YMLP ETF
The new fund will be just the second ETF in the space, tracking
the Solactive High Income MLP Index. This benchmark includes all
MLPs operating with one of the following as a substantial business
segment: exploration and production of oil and/or natural gas;
sale, distribution and retail marketing of propane and other
natural gas liquids; marine transportation of one or more of the
following: crude oil, dry bulk, refined products, liquefied natural
gas (“LNG”), and other commodities; direct mining, production and
marketing of natural resources, including timber, fertilizers, coal
and other minerals (see A Closer Look At The Canadian Energy Income
ETF).
Recently, this resulted in a product that was heavily
concentrated in the energy sector, and it also included three
royalty trusts along with 22 MLPs. While the product will include
royalty trusts, it will remain focused on MLPs; royalty trusts will
not make up more than 20% of the total index. It should also be
noted that the fund requires component securities to have a market
cap of at least $400 million with a three-month average daily
trading volume of at least $1 million in order to be included in
the Solactive Index.
Furthermore, the product will also take a number of steps in
order to make sure that only the highest yielding securities are
included in the fund. First, companies are ranked based on three
key metrics; current yield, coverage ratio, and distribution
growth. Once these ranks are calculated, the firm adds up the three
and ranks all the component firms on this ‘total rank’. The 25
highest ranked firms on this metric are then chosen for inclusion
in the benchmark, ensuring that the product has a focus on high
yielding securities (read Top Three High Yield Financial ETFs).
MLP ETFs
Currently, most products in the MLP space are structured as ETNs
in order to avoid some of the tax headaches that come with the
space. YMLP is structured as a ‘C’ Corporation for federal income
tax purposes which means that distributions are usually
tax-deferred returns of capital. ETNs on the other hand, since they
don’t actually hold the securities, are not subject to the same
rules and payouts are pretty much identical to what investors see
in other types of securities (investors should consult their tax
professionals for more on how this can impact their
portfolios).
While this may be an issue for some, the structure is clearly
popular with investors already. The only other MLP ETF on the
market today, the Alerian MLP ETF (AMLP), has
close to $2.8 billion in AUM and sees volume of about 1.4 million
shares a day. This fund holds a similar number of securities and
sees a comparable expense ratio at 0.85%-- three basis points more
than YMLP. The fund also pays outs a high level to investors as the
fund has a 5.9% yield. Nevertheless, if the MLP ETN space and the
success of AMLP is any guide, there is plenty of room for many
entrants in the space, suggesting that this brand new fund from
Yorkville could see high levels of inflows in short order.
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