Thanks to low U.S. Treasury yields since the start of the year, the master limited partnership (MLP) space has been an attractive investment spot for investors. While most traditional income asset classes produced miniscule yields, master limited partnerships (MLPs) lured investors with their higher payouts and stable cash flows.
Moreover, the space turned out to be a better choice given the equity market volatility this year.
The popularity in the space was supported by a flurry of new product launches this year. There seems to be no slowing down of the trend, with the latest to join the bandwagon being InfraCap MLP ETF – the first pure play actively managed MLP ETF. The fund was launched on October 1st and trades under the ticker AMZA.
AMZA in Focus (AMZA)
The newly launched ETF looks to provide a high level of steady income and capital appreciation by providing exposure to a portfolio of high-quality, midstream energy MLPs and related general partners.
These midstream MLPs are primarily involved in the production, gathering, transportation, storage and processing of oil, natural gas, natural gas liquids and refined products.
The fund aims to generate an initial annualized yield of 8% and would require tax reporting on a single 1099 Form. This would save investors from filing complicated K-1s, which can be a hassle at tax time. Moreover, the fund might use options strategies, short selling or modest leverage to enhance returns.
With this focus, Kinder Morgan Energy currently occupies the top spot in the fund with roughly 10% allocation, followed by Markwest Energy and Magellan Midstream with 7.5% and 7.2% allocation respectively.
As it is actively managed, the fund is relatively expensive charging 1.05% as annual fees.
How Does it Fit in a Portfolio?
The fund is an intriguing choice for investors seeking exposure to the U.S. shale energy boom. Moreover, MLPs represent an attractive investment option for such investors in the current low interest rate environment.
Not only do MLPs provide high yields, these also produce relatively stable cash flows and have solid growth potential. Due to the long-term nature of these contracts, they provide relatively consistent and predictable cash flows.
As MLPs are structured as pass-through entities — they do not pay taxes at the entity level and are thus able to pay out most of their earnings to investors.
Further, MLPs provide diversification benefits to a portfolio as these have very low correlation with other asset classes including equities and commodities.
Can AMZA Succeed?
There are already quite a number of funds targeting the MLP space with Alerian MLP ETF (AMLP) the most popular product with an asset base of $9.2 billion and average trading volume of more than $3 million shares.
However, AMLP’s expense ratio before deferred taxes is 0.85% but the gross expense ratio is extremely high at 8.56% currently. The fund has an annual dividend yield of 6.09%.
Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure Index (MLPI) take the next two spots with an AUM base of $6.2 billion and $2.2 billion respectively. Both AMJ and MLPI charge 85 basis points as fees and offer an attractive yield of 4.74% and 4.41% respectively.
Though AMZA is the first pure actively managed product targeting mid-stream MLP companies, we have another product in the space – First Trust North American Energy Infrastructure Fund (EMLP) – which is also an actively managed fund targeting both MLP and utility firms. EMLP manages an asset base of $865.7 million charging 95 basis points as fees.
Competition is a bit stiff in the MLP space, but if the newly launched product does manage to generate its targeted yield of 8%, it might manage to carve out a niche for itself and in turn build a sizable asset base.
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