New ETFs Combine MLPs, Stocks

Cushing Asset Management, a longtime presence in the MLP investing space, whose indexes underlie several exchange-traded products, today entered the ETF market as an issuer, with the launch of four index-based ETFs that offer exposure to MLPs and common stocks.

The four funds in the Cushing Sector Plus family are as follows:

• Cushing Energy & MLP ETF (XLEY)
• Cushing Utility & MLP ETF (XLUY)
• Cushing Transportation & MLP ETF (XLTY)
• Cushing Energy Supply Chain & MLP ETF (XLSY)

Each comes with an expense ratio of 0.65% and lists on the NYSE Arca.

Income Goals

The four funds also have an income focus, selecting components based on dividend yield. Each one includes components of the popular Cushing 30 MLP Index and components of several popular sector indexes that are associated with the MLP space.

“We were looking for sectors that were fundamentally related to MLPs,” said Todd Sunderland, the firm’s head of risk management and quant strategies, noting that the funds are aimed at investors looking for income.

“We’re trying to provide it in every area they might consider. If they’re looking at the transportation index, this offers a yield tilt within the transportation realm. If they’re looking at energy, this is a yield tilt within the energy sector. Utilities already have a yield bent to them, but this has a little bit more,” he added, pointing out that all the funds’ underlying indexes have yields in the vicinity of 4% or higher.

“These are sector exposures that have a yield tilt, so you’re getting a little bit of income at every portfolio decision with the idea of not compromising that sector exposure you’re trying to accomplish,” Sunderland said.

Methodology

XLEY includes exposure to components of the S&P 500 Energy Index, while XLUY offers exposure to components of the S&P 500 Utilities Index. Similarly, XLTY combines exposure to MLPs with exposure to components of the Dow Jones Transportation Average, and XLSY does the same with both the S&P 500 Energy Index and the S&P 500 Materials Index.

The portion of each fund from the Cushing 30 MLP Index is arrived at by ranking the index’s components based on current yield and selecting the 12 securities ranked sixth through 17^th, with each assigned a weight of 2% in the final index. Those ranked first through fifth are excluded because high yield can sometimes be accompanied by higher risk, according to Sunderland.

The indexes representing the selection universes for each stock portion of the funds also have their components ranked by current yield, with any security with a rank of less than 1% excluded. Individual components are capped at a weighting of 6%, which Sunderland notes also serves to limit stock-specific risk.

At each quarterly rebalancing, the stock portion of the index is weighted at 76% of the portfolio (XLSY split the weight for stocks evenly between components of the energy and materials sectors), while the MLP portion is weighted at 24%, ensuring none of the tax consequences associated with MLPs are triggered for the ETFs, and that investors do not have to contend with K-1 tax forms.

At the most recent rebalancing, XLEY’s underlying index had 35 components; XLUY’s had 39; XLTY’s had 28; and XLSY’s had 50.

Contact Heather Bell at [email protected]