Equity: U.S. MLPs
The MLP segment is perhaps the most complex in the entire ETF industry. In fact, the difference in exposure, taxation and risk between the three structures (ETN, open-ended fund,
“The MLP segment is perhaps the most complex in the entire ETF industry” C-Corporation) is great enough that we do not score MLP products. Finding the structure that works best for you is the most important step in the MLP segment, so instead of putting grades on all MLP ETPs, we compared the structures in a comprehensive white paper, which can be found at http://www.etf.com/docs/MLPGuide.pdf. Only after you have chosen a structure can you pick the fund or note that suits your needs.
ETNs charge around 85 bps. ETFs’ higher fees are driven by deferred tax expenses—a backward-looking snapshot of taxation at the fund level. AMLP and AMJ are the clear favorites for trading, but many of the funds in the segment can be traded without onerous costs. For those who want pure MLP exposure in ETF form, MLPA and AMLP and YMLI track condensed and/or optimized versions of our benchmark, and therefore come closest to neutral takes on the market. Yield-focused YMLP cranks out yield, but has lagged in total returns.
Among the ETNs, AMJ, AMU and MLPW track broad cap-weighted indexes and the remaining ETNs reweight the market in various ways. AMU's broad coverage and simple structure—and its functioning creation process—earn it our Analyst Pick here.
Actively managed EMLP and index-following MLPX and ENFR are structured as classic open-end funds. To do so, they have had to dilute their LP interests in MLPs because a RIC compliant fund can hold just 25% of its assets in MLPs. (Kinder Morgan Inc, the follow-on to Kinder MLPs, has a hefty presence in these ETFs, but none in the pure play structures.)
In all, legal structures, tax preferences, liquidity and the strategy or thesis of the portfolio each play huge and at times conflicting roles when choosing among the MLP ETPs. (Insight updated 02/27/17)
All Funds (28)
IMLP $146.57 M 146573423.5779 wobbly trading
YMLP $95.5 M 95499555.471104 C-corp w/ decent AUM
MLPY $47.59 M 47589710.31 thin trader
AMUB $31.65 M 31648950 newer series to AMU
MLPJ $8.9 M 8895216.063109 C-corp; hard to trade
MLPA $502.83 M 502830096.66507 C-corp
ZMLP $82.71 M 82705000 C corp
AMZA $259.48 M 259482344.932 C-Corp; Active
MLPB $44.67 M 44674050 newer sister to MLPI
MLPE $27.51 M 27510000 N/A
ATMP $500.06 M 500055294.1147 workable trading volume
TPYP $66.83 M 66825000 new fund, new issuer
MLPO $85.2 M 85196017.121764 IMLP has lower costs
AMJ $3.98 B 3984093419.8611 May trade at fleeting premiums
MLPC $126.7 M 126700000 middling liquidity
BMLP -- N/A
EMLP $1.64 B 1642472865 Actively managed ETF
AMLP $10.74 B 10743552088.05 very liquid; C-corp structure
MLPG $15.46 M 15455440 trades poorly
ENFR $31.77 M 31769790 ETF w/ weak investor interest
YMLI $38.72 M 38723212.8 C-corp; wider spreads
MLPX $160.81 M 160810853.41343 ETF with decent assets
AMU $398.01 M 398010570.0198 Broad ETN
MLPI $2.67 B 2667868982.3216 Infrastructure focused ETN
YGRO $12.52 M 12517200 trade with care
MLPN $354.42 M 354424022.29159 solid AUM; decent volume
MLPW $9.42 M 9415360 low AUM
OSMS $638.9 K 638897.94 very hard to trade
ETF.com Grade as
Equity: U.S. MLPs
ETF.com Efficiency Insight
For a thorough analysis of each MLP ETP structure, please see our MLP Guide: http://www.etf.com/docs/MLPGuide.pdf. Only after you determine which structure best suits your needs can you go
“Strong index performance translates to higher deferred tax expenses in C-corps” about comparing the Efficiency of each fund.
The cost and tax treatment of exchange-traded MLP exposure varies wildly with your choice of vehicle. The C-corporations charge a wide range of fees which vary dramatically depending on the amount of deferred tax expenses. C-corps are highly unusual in that they are taxed at the fund level, and are required to include deferred income tax expenses in their advertised expense ratios. This balloons their headline fees over and above their management fees—typically around 80 bps—up into the 4% to 8% range.
Because C-corps’ distributions are taxed at the corporate level before being passed along to shareholders, these funds will always be underleveraged to their benchmarks. The factor of this underleverage is roughly 35%, and can be seen in each fund’s beta to its underlying indexes (beta of ~0.65). The deferred income tax expenses in the headline fee reflect the impact on NAV (over the past year) of this underleverage. Strong index performance translates to higher deferred tax expenses.
For ETNs, fees and taxes are far simpler. They tend to charge around 85 bps and distributions are taxed as ordinary income, while changes in share price upon sale are treated as capital gains/losses. While appealing in its simplicity, this tax treatment offers no opportunity for tax-deferred income—a primary draw to the space for some MLP investors. ETNs are backed by the issuing banks’ promise to pay, not by securities.
The lowest fees in the segment belong to some (but not all) of the traditional open-ended ETFs. The traditional open-ended funds can only hold a maximum of 25% pure MLPs, so they don’t deliver pure play exposure. Still, they avoid most of the extra layer of taxation. The distributions from these ETFS tend to be smaller than that of C-corps and ETNs, and the taxation of distribution is a mix reflecting their their varied portfolios. (Insight updated 02/27/17)
ETF.com Tradability Insight
Investors have a decent selection of MLP ETPs from a trading point of view.
The most popular ETN in the segment is AMJ, while the most popular C-corp ETF is AMLP. Both can be
“Both AMJ and AMLP can be traded cheaply and easily” traded cheaply and easily, and are the clear options for active traders. MLPI, an ETN and EMLP, an ETF, also get strong volume, and trade with tight spreads.
A third tier of ETPs including MLPW, MLPN and AMU can also be fairly traded with relative ease using limit orders set close to NAV.
Skipping to the bottom of the liquidity spectrum, you’ll find products like OSMS, which doesn’t trade a single share most days. Skilled traders might be able to access this note fairly, but novices could pay dearly in transaction costs. ETPs with poor liquidity like OSMS have very low trading volume and wide, variable spreads.
Larger investors, note that we don’t display a block liquidity score for most ETNs, so a “0” can be somewhat misleading. Larger investors should also use special care trading ZMLP, MLPJ and YMLP—these funds have a large footprint in underlying markets so creates/redeems might adversely move underlying prices.
Lastly, one caveat for AMJ’s great on-screen liquidity: It’s closed to creations and can thus be subject to premiums. (Insight updated 02/27/17)
ETF.com Fit Insight
Investors in MLP funds can’t ignore the structure of the vehicle, which can radically impact performance. Despite the small pool of MLPs, the ETPs covering the space often deliver
“C-Corp ETFs offer varying exposure but share low-beta to their indexes” extremely different returns even allowing for their different structures. In short, prudent investors have little choice but to wade into the weeds to understand the key distinctions between the products.
The C-Corporation ETFs offer varying exposure but share low-beta to their respective indexes due to taxation at the corporate level. In return for foregoing this performance, investors get some of the tax deferral of the distributions which lowers the tax basis for gains on (eventual) sale rather than facing immediate tax.
The C-corp funds include broad exposure (MLPA), targeted exposure (AMLP, YMLI), high yield (YMLP, ZMLP), actively-managed (AMZA) and small-cap MLPs (MLPJ). Despite covering just transport and storage MLPs, AUM-leader AMLP looks very similar to our view of the MLP market, so investors are not making nearly as big a leap from the market as they may think in choosing it. When assessing the high yield funds, check the portfolio yield on the Fit tab, distribution yield on the overview and the total return on the Efficiency tab. High yield funds were hit hard in winter of 2014/2015.
EMLP, ENFR and MLPX are restricted in the weighting they can have to MLPs due to their open-end fund structures. They forego pure play exposure as well as deferred taxation, aiming for MLP-like performance in a simpler wrapper. EMLP is an actively managed portfolio that holds an institutional share class of MLPs that pays stock dividends, taking its quasi- MLP exposure up to nearly 45%. Still, the 55% of the portfolio not in MLPs is currently held in energy plays like Kinder Morgan Inc, domestic utilities and Canadian energy infrastructure firms. This portfolio mix weathered the oil price shock (winter of 2014/2015) better than some pure-play products. MLPX and ENFR have just 25% of their portfolios in LP interests in MLPs, but also hold GP MLP interests in addition to firms their index providers have determined to have similar attributes to MLPs.
In the ETN space there are three broad market funds - MLPW, AMJ and AMU - whose exposure varies only slightly. The choice between these ultimately comes down to costs and credit risk, as they are all promises to pay by their issuers. Our pick for the space is AMU based on its decent liquidity and functioning creation mechanism. MLPN is the equal-weighted version of those three notes, with a smaller tilt. For those targeting a specific slice of the MLP market, MLPG and MLPI do just that. MLPI tracks a condensed version of our segment benchmark that includes only transport and storage firms, while MLPG targets only those involved in the natural gas sector.
Alternative takes include MLPY, which tries to take a segment that already has big yields and ratchet it up a notch by tracking an index that equally weights the 25 highest-yielding MLPs—an approach that suffered recently as did the high-yield C-corps. YGRO seeks growing yield, tempered by liquidity-weighting.
ATMP has a dynamic index with frequent rebalances that blends LP and GP interests in MLPs with other securities in an attempt to maximize total return. MLPC fundamentally selects and weights its holdings based on factors like distribution growth and sustainability. IMLP provides broad coverage, redefined with liquidity-based pricing for index constituents. OSMS seeks for yield as well as low correlation to oil and gas prices. (Insight updated 02/27/17)