Energy MLPs emerged as clear winners lately thanks mainly to the perked-up activity in the oil and gas sector in the U.S. and fall in long-term bond yields. In a pretty choppy investing backdrop in 2013, this rate-sensitive sector delivered decent average gains of about 16%. And this year, the space is poised for even more gains owing to a favorable operating environment (read: MLP ETFs: Still Good for Income Investors?).
Also, flattening of the yield curve has made this investing corner a good choice for income-starved investors. Fund issuers also seem enthusiastic as evident by the flurry of launches in the MLP space of late.
The newest product in this market comes from Barclays in the ETN form. Their Barclays OFI SteelPath MLP ETN offers yet another way to target this increasingly in-focus corner of the investing arena. The new product started trading on April 24, 2014.
OSMS in Focus
This ETN looks to track the Barclays OFI SteelPath Midstream MLP Index which is a benchmark of midstream master limited partnerships. The key motive of the index will be maximizing distribution growth and lowering commodity sensitivity (read: Boost Income and Growth with MLP ETFs).
The index includes components based on certain criteria like distribution payment history, lower relative correlation to oil and natural gas prices, and free-float market capitalization as well as average daily trading value, as per Barclays. The product will charge 85 bps in annual fees, making it slightly more expensive than average.
How Does It Fit in a Portfolio?
This ETN could be an intriguing option for investors seeking broad exposure to the MLP space with a focus on income. The product has been designed as an income generating investment vehicle for those seeking solid payments in this space.
The product should satiate some of investors’ need as it will not face the K-1 issue at tax time thanks to its ETN structure unlike MLP ETFs. Investors should note that an ETN is an unsubordinated debt security that promises to pay out a return equal to an index (read: How to Play the MLP ETF Space).
This is totally different from an ETF which holds the securities that forms a particular benchmark. Since an ETN doesn’t really hold the securities, it is not required to be classified as a partner and so a K-1 requirement is rendered unnecessary.
Can it Succeed?
At present, the MLP ETF space is rife with competition from big players like Alerian MLP ETF (AMLP) topping the list amassing about $8.36 billion of assets. Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure Index (MLPI) are the next two position holders with a respective $6.19 billion and $1.99 billion of assets. This makes the scenario a bit tough for OSMS (read: Barclays Debuts New MLP ETF (ATMP)).
OSMS will not receive any advantage on expense ratio as it charges in line with the sector toppers. So, all it needs for garnering investors’ assets is a high dividend yield. Also, as per the issuer, “certain investors have a preference for the ETN structure in this asset class” which should give some advantage to this product. Over the past week, ETNs have been the winners in the MLP space.
We expect the segment and the newly introduced fund to lead the way higher in 2014. Lower-than-expected rise in interest rates this year will keep MLP ETPs in vogue. Investors might squeeze some profits and generous yields out of MLP ETPs this year as long as the flight-to-safety puts a lid on interest rates (read: MLP ETFs: Still Good for Income Investors?).
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