With the fiscal cliff solved and dividend tax rates still at relatively favorable levels, some might have thought that demand for MLPs and MLP ETNs would diminish. However, that has not been the case, at least in the first part of the year, as high yielding securities have remained in focus no matter what their tax structure (see 4 Best ETF Strategies for 2013).
Playing on this continued trend here in 2013 is iPath, a firm that already has a host of other Exchange-Traded Notes, but is just now stepping into the crowded MLP world. The Master Limited Partnership space has more than a dozen ETPs so it could be a fierce battle for iPath in order to garner a significant level of assets as more than $10 billion is in the relatively-small sector already.
Still, iPath seems undeterred by the competition as it has just launched an MLP ETN of its own, the S&P MLP ETN (IMLP - ETF report) . This new note will charge investors 80 basis points a year in fees, will pay a quarterly coupon, and will be linked to the performance of the consolidated volume-weighted average price level of the S&P MLP Index (read Venezuela: The Next Black Swan for Oil ETFs?).
This benchmark consists of both pure MLPs as well as publically traded LLCs that have a similar legal structure—and tax benefits—as MLPs. The index also stipulates that at the rebalancing date no single security can account for more than 15% of the benchmark, and that all the stocks that have at least 4.5% of the portfolio each cannot make up more than 45% of the index, in order to insure a high level of diversification.
In terms of index members, there are 56 in total with an adjusted market cap of about $10.5 billion. Some of the top constituents include Enterprise Product Partners (EPD - Analyst Report) , Kinder Morgan Energy Partners , and Plains All American Pipeline (PAA - Analyst Report) .
This approach does give the note an exposure profile that is very similar to what investors already see in a number of more popular MLP products like AMLP, or MLPI just to name a few. However, the more stringent caps on the biggest holdings and a relatively more spread out profile could add to the fund’s appeal for those seeking a different take on the MLP world (read How to Play the MLP ETF Space).
Additionally, investors should note that the product is a bit cheaper from an expense ratio perspective beating out many of the most popular products in the space. Only the ETRACS Alerian MLP Index ETN (AMU - ETF report) is able to match IMLP from a cost perspective, while just Global X’s (MLPA - ETF report) is able to truly beat out the product coming in at just 0.45% per year in fees.
Despite the lower costs for each of these other two competitors, neither has managed to amass much in assets or volume. The two have a combined $65 million in assets, a figure that is more or less a rounding error for the biggest MLP products, suggesting that many haven’t embraced a low cost approach when it comes to MLP investing (see ETFs Vs. ETNs: What is the Difference?).
Given this trend and the heavy competition already present in the space, it could be difficult for IMLP to carve out a niche, especially with its similar holdings profile. Instead, the upstart ETN will have to rely on the solid iPath brand name, the potential for a more spread out asset distribution, and a lower cost to compete in this fierce segment of the exchange-traded product world.
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