UBS Adds Short ETN To Line Of MLP Products

September 29, 2010

UBS gives MLP bears an arrow to add to their quiver with new ETN.

UBS, the sponsor of the E-TRACS family of exchange-traded products, launched an ETN designed to deliver short exposure to the energy-focused master limited partnership space that is garnering so much attention at a time when rates are low.

The new E-TRACS 1X Monthly Short Alerian MLP Infrastructure Total Return Index (NYSEArca: MLPS) seeks to return the inverse performance of the Alerian MLP Infrastructure Total Return Index, which comprises 25 energy infrastructure master limited partnerships.

The new product is a complement to UBS’ existing Alerian MLP-based products, which include the UBS E-TRACS 2x Monthly Leveraged Long Alerian MLP Infrastructure ETN (NYSEArca: MLPL) and the UBS E-TRACS Alerian Natural Gas MLP ETN (NYSEArca: MLPG).

Many MLP products shoot off dividends of more than 6 percent, making them quite attractive at a time official interest rates are near zero and
U.S.
stocks are gyrating with great volatility but haven’t returned much year-to-date. But UBS may be one step ahead of the crowd by offering investors an MLP product for a rainy day.

Master limited partnerships (MLPs), which are common in the energy and extractive industries sectors, typically derive at least 90 percent of their income from interest, real estate rental or natural resources development.

Because the Internal Revenue Service views shareholders of the MLP as “partners” in the enterprise, an MLP isn’t required to pay taxes at the corporate level and thus avoids double taxation of its income.

Unlike their ETF cousins, ETNs are senior unsecured debt obligations that track an underlying index perfectly, minus costs. The catch is that they are subject to the credit risk of the issuer. If UBS were ever to face bankruptcy, then its ETN investors would wind up in line behind the bank’s secured creditors.

The top holdings of the underlying index include Enterprise Products Partners LP, Kinder Morgan Energy Partners LP and Magellan Midstream Partners, LP.

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