In recent years, the interest for investments in the Master Limited Partnership (MLP) space has grown enormously. Securities in this segment have become popular due to their structure which promotes big yields, and the nature of the companies which encourages a focus on lower risk segments like energy transportation or infrastructure.
A number of ETFs have stepped into this market recently in order to give investors varying types of exposure to this relatively undiscovered product type. These have split the MLP market into a number of different segments, including infrastructure, high yield, and natural gas, just to name a few (also read ETFs and ETNs: What Investors Need to Know).
The latest fund to hit the space comes to us from Global X. The company already has two MLP products—(MLPA - ETF report) and (MLPJ - ETF report)—and has now rounded out its offering with the brand new Global X MLP & Energy Infrastructure ETF (MLPX - ETF report). This interesting—and cheap—ETF could be a new way for investors to play the space, and we have highlighted some of the key details from this launch below:
MLPX in Focus
The fund follows the Solactive MLP & Energy Infrastructure Index, which is a benchmark that is designed to be a barometer for midstream energy infrastructure MLPs and corporations. At the beginning of the month, the benchmark had 35 holdings in its basket, and it looks to pay out income on a quarterly basis.
The portfolio is heavily skewed towards natural gas pipeline operators, as these make up about 75% of the fund, compared to just 25% for petroleum pipelines. In terms of individual holdings, Enbridge, Transcanada, and Kinder Morgan tie for the top spot with about 9% of the portfolio each (also see 3 New ETFs Attracting Investor Interest).
Investors should also take note of the product’s structure, which is an ETF. Generally, most MLP products are exchange-traded notes in order to avoid a series of taxation issues that culminate in a K-1 being needed at tax time.
MLPX is structured as a ‘Regulated Investment Company’ though, and thus is not subject to corporate taxes, but it still provides access to the MLP space. Plus, K-1s are not required at tax time, according to a recent press release by Global X.
It is also worth pointing out that MLPX doesn’t hold solely MLPs, and that pure infrastructure companies, and MLP affiliates also are included. These affiliates usually own, directly or indirectly, MLP general partner interests. The general partner manages the MLP and typically holds an economic interest in it and receives a percentage of the MLP profits over a certain threshold (see How to Play the MLP ETF Space).
How does it fit in a portfolio?
This ETF could be a great choice for those who are seeking a low-cost option in the MLP world, as the costs here are just 45 basis points, compared to an average that is nearly double. Plus, the infrastructure focus could result in lower volatility levels, something that could be key in rocky market environments.
The product might not be appropriate for those seeking a focused play on just MLPs, as MLPX includes a variety of other types of securities. The product might see low volume and wide bid ask spreads, at least initially, so tradability could be a question mark for the beginning of the ETF’s life.
There are quite a few exchange-traded products already in the MLP space, so it could be difficult for MLPX to build up assets. This is particularly true if investors consider the level of popularity that is seen in MLPA and MLPJ, as both of these Global X products have seen less than $70 million in assets under management.
Meanwhile, in the infrastructure segment of the MLP world, there are a few other products that could be a roadblock to wide adoption of MLPX. In particular, the ultra popular (AMLP - ETF report) and (MLPI - ETF report) have an infrastructure focus, and hold more than $1 billion each in assets, while (EMLP - ETF report) also has a similar holdings profile in the space (see MLP ETF Investing: The Surge Continues).
These three all have expense ratios that are far higher than what investors see in the newly launched MLPX though, with the Global X fund charging roughly half as much as some of its competitors in the space. Due to this, it is pretty clear that Global X will be competing with the aforementioned products primarily on price.
The new fund will have to rely on this, and its ETF structure, to pull in investors for this increasingly competitive space. But if it can attract some cost-conscious investors, Global X may have a winner, though the fight will likely be difficult, especially if its other forays into the MLP market are any guide.
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