Global X Launches Low-Cost MLP ETF

April 19, 2012

The MLP space heats up with a low-cost ETF from Global X.

 

The Global X MLP ETF (NYSEArca: MLPA) went live today, going head-on against the ALPS Alerian MLP ETF (NYSEArca: AMLP) with a similar portfolio that boasts the lowest price tag in the segment.

MLPA, which will track a Solactive Index and comprise some 30 MLPs involved in everything from transportation to storage to processing, refining, marketing, and mining of natural resources, costs only 0.45 percent. That compares to 0.85 percent expense ratio for both AMLP, and the segment’s largest ETN, the $4 billion JP Morgan Alerian MLP ETN (NYSEArca: AMJ).

Indeed, MLPA’s portfolio is in a way a me-too fund offering exposure to the MLP market that’s nearly identical to AMLP’s, aside from the fund’s slightly broader diversification in holdings thanks to its inclusion of more production and exploration partnerships than AMLP has. As such, their performance should also be similar.

What investors will get with MLPA that they didn’t before is an “enhancement” of income over AMLP as they get an extra 0.40 percent added to the fund’s returns, Bruno del Ama, chief executive officer at New York-based Global X Funds, the company launching the ETF, said in a telephone interview.

“We are not in the business of just adding another ETF to the market and adding complexity to investors,” del Ama said. “We only bring value-added funds. In this case, the value-add is a low-cost structure.”

MLPs are partnerships that generate most of their income from the natural resources sector, but they make money from fees rather than from the underlying commodities themselves, which protects them from volatility spikes in commodities prices.

That structure also means MLPs are not taxed as corporations, a difference that means they tend to pay hefty dividends, an attractive feature in times of ultra-low interest rates. Indeed, MLPs have recently been paying higher yields than some other income asset classes such as REITs and utilities, and they have outpaced many equities-focused portfolios.

The pipeline-type business model is a source of steady income that adds stability to a portfolio, especially as it shows very low correlation to the broader equities market and the economy in general, said del Ama.

“The exploration and production of energy is a big area of growth in the U.S.,” he said, adding that the prospectiveness of the segment is also tied to the changing landscape on the transportation of that energy, thanks to government focus on U.S. energy independence.

Tracking Error An Issue

But the attractions aren’t without pitfalls. MLP-based ETFs can be a tax headache to investors. Unlike most other ETFs, MLP-based ETFs such as MLPA and AMLP are, in fact, taxed as corporations, which puts them at risk for double taxation.

Even as distributions to investors in many cases are deemed nontaxable return of capital, the complex tax structure could affect overall returns and cause the fund’s performance to diverge from its index.

 

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