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ETRACS Adds A New Leveraged MLP ETN To Its Lineup

UBS ETRACS has a new leveraged ETN tracking the S&P MLP index. The ETN holds the top eight weighted MLPs from the index. This is a speculative choice for income and it will likely be very volatile. On July 14th, ETRACS newest ETN started trading on the NYSE Arca. The fund is the ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ). UBS (NYSE: UBS ) has a fair selection of MLP ETNs already, and MLPV will be the ninth addition to their list in the MLP category of ETNs. This security is an unsecured debt note that tracks the S&P MLP index with 2x leverage. The S&P MLP index tracks the leading partnerships trading on the NYSE and Nasdaq, which includes both MLPs and LLCs. The index tracks 79 companies in total. The leverage in this fund is reset on a monthly basis instead of daily. Distributions are made quarterly and linked 2x to the index. Here are some features of MLPV. Market Cap-19.2 million Expense Ratio-0.95% 2x Index Yield-12.49% Maturity Date-7/14/2045 Here are the holdings of the ETN and the percentage weighted. MLPV only holds the top eight out of the 79 total constituents that the index tracks. Enterprise Products Partners LP EPD 14.78 Energy Transfer Equity LP ETE 11.25 Energy Transfer Partners LP ETP 8.08 Magellan Midstream Partners LP MMP 6.43 Plains All American Pipeline LP PAA 6.19 Williams Partners LP WPZ 4.54 Buckeye Partners LP BPL 3.61 MarkWest Energy Partners LP MWE 3.61 Here is how MLPV compares to some similar funds. Ticker Symbol Yield Expense Ratio MLPV 12.49% 0.95% ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN MLPL 15.02% 0.85% iPath S&P MLP ETN IMLP 5.55% 0.80% This ETN might appease people who are chasing yield at the expense of high volatility and risk. It is definitely not the kind of fund you should use if you are seeking stable and conservative income. The downturn in the oil price last year has pummeled many MLPs, including IMLP which tracks the same index as MLPV. The one year chart below shows the four highest yielding MLP ETFs. (click to enlarge) The expense ratio of .95% is much too high for my liking, but the lowest ratio for any available MLP ETF is only .45% and some even have fees as high as 5-8%, which is extremely high for any ETF. The fund that has the .45% ER is the Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX ), but it has a drastically lower yield of 2.66% when compared to most other MLP funds. The MLP ETF I like most for finding a balance between high yield and a decent expense ratio is the Direxion Zacks MLP High Income Shares ETF ( ZMLP) which currently yields 11.33% with an net expense ratio of .65%. With that said, one should only invest in this or any MLP with the expectation of volatility. With oil prices currently depressed, this might be a relatively safer time to initiate a position in these high yielding securities. This fund is structured as an ETN rather than an ETF, and there is good reason for this. The nature of MLPs gives them the advantage of legally escaping corporate taxes, but if the partnerships are in an ETF, then the corporate tax applies to the ETF itself and thus cancels out the tax advantage of MLPs. The drawback to the ETN however, is that the distributions are considered taxable income, which is not the case when an MLP is held individually. The tax consequences of owning MLPs can be very tricky, so it is always best to consult a tax professional before investing in any MLP or MLP fund and make sure you know exactly how you will be taxed. Due to the leverage used in this ETN, I consider it speculative income and potential investors should be aware of the risks. In addition to the leverage, MLPs present volatility due to being exposed to the energy sector. In the short time that MLPV has been trading, the underlying index has seen a bit of a sell-off which resulted in a price decline in the ETN. This dip might make for a good buying opportunity, but the volatility and risk should not be underestimated. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Consider MLPX For Distribution Growth And Total Return

Summary GPs generally exhibit lower yields than MLPs, but can provide higher distribution growth and total return rates. The Global X MLP & Energy Infrastructure ETF is a fund that contains a high proportion of GP or GP-holding companies. This article analyzes the composition and distribution growth profile for this ETF. Introduction The general partners (GP) vs. master limited partnerships (MLPs) question has been addressed recently on Seeking Alpha. In an Oct. 2014 article entitled ” Look At The MLP GP Companies For An Alternate Path To High Total Returns “, author Tim Plaehn explains: The pure-play MLP general partner companies offer a different way to participate in the results of the partnerships they sponsor and manage. The GP companies leverage the growth rates of the LP distributions, providing more of a total return investment potential based on high distribution or dividend growth rates. A similar conclusion was reached by Seeking Alpha author Harry Domash ” General Partners Outperform Their MLPs ” (Aug. 2014). Investors who are uncomfortable with picking individual stocks may prefer owning a basket of funds. Are there any exchange-traded products that own only GPs? The answer is no, but there is a fund that comes close: the Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX ). Fund details MLPX appears to be a little-known fund, with only 161 followers on Seeking Alpha. Pertinent fund details are shown in the table below (data from Morningstar ): MLPX Yield (ttm) 3.17% Expense ratio 0.45% Inception Aug. 2013 Assets $106M Avg Vol. 103K No. holdings 40 Avg. Cap $15.2B Annual turnover 29% Morningstar rating NR Composition The 40 constituents of MLPX are given in the table below. Also shown is the % assets, ttm yield, market cap and type of each constituent . The % assets are obtained from the fund’s website while the ttm yield and market cap are obtained from Morningstar. In categorizing the type of company, I have used the classification types in the CBRE Clarion Securities MLP Master List website, which considers these following MLP or MLP-related classes: [i] traditionally structured midstream MLPs, [ii] upstream MLPs, [iii] traditionally structured other MLPs (“other”), [iv] variable distribution MLPs (“variable”), [v] MLP GP holding companies (“GP”), [vi] other publicly-traded companies that own GP interest in an MLP, but the GP stake is not their only asset (“GP – diverse”), and [vii] other MLP-related securities. Name Ticker Assets / % Yield / % Cap / B Type MARATHON PETROLEUM CORP (NYSE: MPC ) 10.17 1.79 30.2 GP – diverse WILLIAMS COS INC (NYSE: WMB ) 9.97 4.50 38.3 GP – diverse ENBRIDGE INC (NYSE: ENB ) 8.83 3.29 36.7 GP – diverse TRANSCANADA CORP (NYSE: TRP ) 8.68 4.43 26.3 GP – diverse CHENIERE ENERGY INC (NYSEMKT: LNG ) 6.95 0.00 16.0 GP – diverse SPECTRA ENERGY CORP (NYSE: SE ) 6.76 4.81 20.7 GP – diverse EQT CORP (NYSE: EQT ) 4.44 0.15 12.0 GP – diverse ONE GAS INC (NYSE: OGS ) 4.34 2.66 2.3 Utilities ENTERPRISE PRODUCTS PARTN (NYSE: EPD ) 4.30 5.23 57.1 Midstream ONEOK INC (NYSE: OKE ) 4.18 6.37 7.9 GP TARGA RESOURCES CORP (NYSE: TRGP ) 4.05 4.12 4.4 GP SEMGROUP CORP-CLASS A (NYSE: SEMG ) 3.78 2.21 2.6 GP – diverse ENBRIDGE ENERGY MANAGEMENT (NYSE: EEQ ) 3.37 0.00 2.0 Other MLP-related securities MAGELLAN MIDSTREAM PARTNERS (NYSE: MMP ) 2.34 4.02 16.0 Midstream PLAINS ALL AMER PIPELINE (NYSE: PAA ) 2.12 7.38 14.6 Midstream ENLINK MIDSTREAM LLC (NYSE: ENLC ) 2.00 3.73 4.2 GP ENERGY TRANSFER PARTNERS (NYSE: ETP ) 1.94 2.10 25.3 Midstream WILLIAMS PARTNERS LP (NYSE: WPZ ) 1.53 7.44 25.3 Midstream MARKWEST ENERGY PARTNERS (NYSE: MWE ) 1.52 6.57 11.0 Midstream BUCKEYE PARTNERS LP (NYSE: BPL ) 1.33 4.47 9.1 Midstream TARGA RESOURCES PARTNERS (NYSE: NGLS ) 0.80 9.96 6.0 Midstream ONEOK PARTNERS LP (NYSE: OKS ) 0.78 9.96 8.6 Midstream WESTERN GAS PARTNERS LP (NYSE: WES ) 0.67 4.80 8.3 Midstream EQT MIDSTREAM PARTNERS LP (NYSE: EQM ) 0.57 2.99 5.6 Midstream NUSTAR ENERGY LP (NYSE: NS ) 0.56 8.38 4.1 Midstream GENESIS ENERGY L.P. (NYSE: GEL ) 0.52 5.53 4.8 Midstream DCP MIDSTREAM PARTNERS LP (NYSE: DPM ) 0.40 10.34 3.5 Midstream SPECTRA ENERGY PARTNERS L (NYSE: SEP ) 0.40 4.65 15.3 Midstream TESORO LOGISTICS LP (NYSE: TLLP ) 0.39 5.17 4.6 Midstream TC PIPELINES LP (NYSE: TCP ) 0.37 5.93 3.7 Midstream SHELL MIDSTREAM PARTNERS (NYSE: SHLX ) 0.31 1.19 5.3 Midstream ENLINK MIDSTREAM PARTNERS (NYSE: ENLK ) 0.29 7.86 6.3 Midstream BOARDWALK PIPELINE PARTNERS (NYSE: BWP ) 0.25 2.84 3.5 Midstream TALLGRASS ENERGY PARTNERS (NYSE: TEP ) 0.22 4.25 2.8 Midstream CRESTWOOD MIDSTREAM PARTNERS (NYSE: CMLP ) 0.20 16.99 1.8 Midstream PHILLIPS 66 PARTNERS LP (NYSE: PSXP ) 0.18 2.50 4.6 Midstream MPLX LP (NYSE: MPLX ) 0.16 3.21 3.8 Midstream HOLLY ENERGY PARTNERS LP (NYSE: HEP ) 0.15 7.33 1.7 Midstream ANTERO MIDSTREAM PARTNERS (NYSE: AM ) 0.15 2.02 3.5 Midstream ENABLE MIDSTREAM PARTNERS (NYSE: ENBL ) 0.06 7.63 6.8 Midstream The allocations of MLPX are depicted in the chart below: As can be seen in the chart above, the majority (60%) of the assets of MLPX are in “GP – diverse” companies, which according to CBRE Clarion Securities are “other publicly-traded companies that own GP interest in an MLP, but the GP stake is not their only asset”. The top 7 holdings of MLPX, namely MPC, WMB, ENB, TRP, LNG, SE and EQT are all classified as “GP – diverse” companies. MLPX also holds a number (10%) of “pure” GP companies such as OKE, TRGP and ENLC, which are classified by CBRE as “companies whose primary assets are G.P. and L.P. interests in their subsidiary MLP.” Consequently, MLPX can be considered to consist of 70% of companies whose GP/LP stake in their subsidiary MLP is either their primary asset or part of their assets. Distribution growth In the past twelve months, MLPX has distributed a total of 51.9 cents. In the twelve months before that, MLPX distributed 38.9 cents. This represents a whopping 33.5% year-on-year distribution growth, on a current 3.17% yield. There is no further dividend history as MLPX has only existed for two years. However, as MLPX is an ETF, it has the ability to control the amount of distributions that it makes, including the capability of providing return-of-capital distributions. Thus, the year-on-year distribution growth of the constituents of MLPX were analyzed in order to determine whether this 33.5% dividend growth was reflective of the distribution growth of the underlying holdings. To calculate this, the recent 24-month dividend history for the 40 constituents of MLPX were extracted from Nasdaq.com , and their year-on-year distribution growth was calculated. The following chart shows the year-on-year distribution growth for the constituents of MLPX. Note that some companies are missing because they either (i) do not pay a dividend (e.g. LNG) or (ii) have less than 2 years of operating history (e.g. SHLX, OGS). As can be seen from the chart above, the year-on-year distribution growth for most of the companies in MLPX is quite robust (with the notable exception of BWP). However, each constituent of MLPX has a different weighting in the index, and therefore a different contribution of distribution growth. I therefore calculated the weighted average of the year-on-year distribution growth of these companies, and the answer came out to 15.6% . I believe that this number (as opposed to 33.5%) better reflects the distribution growth profile for MLPX going forward, if the year-on-year distribution growth for the constituents remains constant. However, considering the current state of oil prices, this may or may not be a true assumption. Performance The following graph shows the total return performance of MLPX versus the ALPS Alerian MLP ETF (NYSEARCA: AMLP ) and the JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ) since the inception of MLPX two years ago. MLPX Total Return Price data by YCharts The graph above shows that MLPX, which consists largely of GP-holding companies, handily outperformed AMLP and AMJ, which are funds that hold only midstream MLPs. This reinforces the conclusions offered by Tim Plaehn and Harry Domash presented above. Tax implications I am not a tax expert, so please take the following discussion with a grain of salt. According to Global X , MLPX operates as a Regulated Investment Company (RIC) rather than a C-Corporation. This is because MLPX contains less than 25% of MLPs (the current allocation is 23%). In doing so, it avoids issues common in other MLP ETFs, such as corporate taxes and K-1s, and it is also IRA and 401(k) eligible. The following table is from Global X: (click to enlarge) Conclusion MLPX is a little-followed ETF whose constituents are mostly either GP or GP-holding companies. It contains less than 25% MLPs, which allows it to operate as an RIC rather than as a C-Corporation. While its current yield of 3.17% is lower than either AMLP (7.54%) or AMJ (6.08%), its actual (33.5%) and projected (15.6%) year-on-year distribution growth rates are much higher than those for AMLP (5.5%) or AMJ (2.1%). Moreover, its expense ratio is only 0.45%, compared to 0.85% for the other two funds. Finally, its total return performance since inception two years ago has significantly outpaced those of AMLP and AMJ. Hence, MLPX may be a good choice for investors seeking the total return and distribution growth of GP companies, but who are uncomfortable with picking individual stocks. Besides general equity risk, the main risk of this fund is that its constituents are highly sensitive to commodity prices, and should these continue to fall, it is likely that the share prices of the funds will fall further. Moreover, the distribution growth going forward may also be reduced from historical levels. Disclosure: I am/we are long MLPX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.