Midstream MLP Funds Faring Better

October 07, 2015

[This article originally appeared in our October issue of ETF Report.]

Jay Jacobs is a research analyst at Global X, a New York-based sponsor of ETFs, with $3.7 billion in managed assets invested in 40 funds available across U.S. and foreign exchanges. Jacobs oversees the firm’s research team and helped establish GlobalXResearch.com, a website featuring original content and curated third-party news and research.

Global X has three master limited partnership ETFs: the pure-play MLP fund, Global X MLP (MLPA), which is down 22.4% as of Aug. 25; the regulated investment companies-structured Global X MLP & Energy Infrastructure (MLPX), down 20.23%; and the Global X Junior MLP (MLPJ), which is down 39.4%. MLPA is the largest of the three funds, with nearly $150 million in assets under management.

MLPA tracks the Solactive MLP Infrastructure Index. Would you describe the index?
It’s an index of the largest MLPs in the midstream sector in the U.S.

Since MLPA is structured as a C-corporation, how do the tax implications affect performance?
On a daily basis, the fund has to accrue a tax liability based on essentially the realized and unrealized gains of the fund. In an up market, the fund will tend to trail the index, because it’s accruing taxes on the way up. In a down market, the fund, in some environments, will lag the index, because it can offset some of the falling with the tax liability. At the end of the year, [the tax liability is] shown as an expense on the prospectus.

Let’s talk about fees and how the fund is performing.
We have a 45 bp management fee, and then there are the tax expenses, which change year to year. It’s difficult to know what that tax expense will be in any given year [as it depends on the fund’s return]. At 45 bps, if my recent research is correct, we are the lowest-management-fee MLP ETF out there. The only other 45 bp management-fee MLP ETF is our MLPX ETF.

I think one of the key reasons this fund has held up better than other MLP funds is because of its midstream exposure. Some other funds may be more focused on the yield characteristics of MLPs, or they’re more broadly trying to access the entire MLP market—regardless of upstream, midstream or downstream.

Our fund is laser-focused on midstream MLPs. What that means is we’re only focused on MLPs involved in the storage, transportation and processing of oil and natural gas. Those businesses tend to be more insulated from the price of oil.

Because they’re in a toll-road business model, they’re paid on the amount of oil or natural gas they’re transporting through pipelines rather than the value of the underlying commodities. You could compare that to upstream, where you’re basically drilling.

If you’re drilling and extracting oil from the ground, you’re selling it at the market price of oil. Those drillers have a high sensitivity to oil prices. Midstream is just taking oil from point A to point B.

What is pressuring the MLP market? Is it weak oil prices, concerns about global growth, a possible Federal Reserve rate hike?
It’s a little bit of everything. It does seem like the MLP market has been trading in line with some other energy stocks, which is pretty surprising to us. We think that the MLP business model is much more robust than other energy stocks. It’s created a situation where the valuations on MLPs are actually quite attractive relative to where they’ve historically been.

Different valuation metrics don’t always make sense for different businesses. One of the measures I like for MLPs in this environment is EV to EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization]. If you look at EV to EBITDA, valuations are at their most attractive point since mid-2011.

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