With an investment selection universe of only about 120 MLP or related C-corp companies, it can be a challenge for an index tracking ETF to set itself apart from the pack. Investors have been increasing their allocation to MLP oriented funds, with over $1.2B of new cash entering the market each month. ETF investor's seek short and longer term beta exposure to the asset class, however, the beta performance can differ significantly depending upon the index methodology. Yorkville ETF Advisors sponsors two ETFs with an alternative approach for creating beta exposure to Master Limited Partnerships. In this article, we focus on the index composition and attributes which will be the benchmark for the relative performance realized by ETF.
To compare ETFs, start with the underlying index tracked by each fund. Covered below are the holdings breakdowns of the AMZ and the two indexes tracked by the Yorkville managed ETFs.
Alerian MLP Index
The AMZ tracks the value of 50 MLPs on a float adjusted, market value weighting. With its market cap weighting, the top 10 MLPs comprise just over 60% of the index value. This table lists the current AMZ constituents, as of 3/21/14 ranked by weighting.
The ALPS Alerian MLP ETF (NYSEARCA:AMLP) holds MLP units to replicate the AMZ index at annual expense ratio of .85%. AMLP with $8.9 billion in assets is, by far the largest MLP focused ETF. The returns of the AMZ can also be replicated with two exchange-traded notes: JPMorgan Alerian MLP Index ETN (AMJ) and ETRACS Alerian MLP Index ETN (NYSEARCA:AMU).
Solactive High Income Infrastructure MLP Index
The aptly named Yorkville High Income Infrastructure MLP ETF (NYSEARCA:YMLI) tracks the Solactive High Income Infrastructure MLP Index with an annual expense ratio of .82%. This index tracks and equal weighting (4% each) of 25 MLPs selected using a ranking system based on "certain criteria relating to current yield, coverage ratio and distribution growth." The result of the selection process is a list of about 21 of what can be considered as the major midstream MLPs and four MLPs that function completely or primarily as general partner holdings, growing distributions from LP unit and IDR holdings.
The weighted average yield for the YMLI index is 5.24%, slightly lower than the current 5.49% of the AMZ. The Yorkville index stands out when you look at the 3-year projected distribution average annual growth rate - CAGR. The YMLI index has an average projected distribution growth rate of 8.40% compared to 7.12% for the AMZ. If the CAGR projections hold, the YMLI index should outperform the AMZ by about 1.5% per year.
Solactive High Income MLP Index
The Solactive High Income MLP Index and the tracking Yorkville Solactive High Income MLP ETF (NYSEARCA:YMLP) takes an objective based approach to MLP investing, with a focus on current yield. The YMLP index tracks 25 MLPs with not a single constituent in common with the YMLI index. The index carries 18 units at a 4.75% weighting, two at 2.9% and five at 1.74%. With a current yield focus, the constituents come from the upstream, coal, propane and water transport sectors of the MLP universe.
Compared to the other two indexes, the YMLP index indicates a much higher average yield of 8.21% with an expense ratio of .82%. However the projected CAGR is just 2.61%. The chart below shows the constituents, weightings and performance numbers of the index.
MLP ETF Considerations
The two Yorkville ETFs and the indexes they track offer some distinct differences from the AMLP ETF and AMZ index. However, with 100% MLP holdings, these ETFs will not match the return results of the tracking indexes. Any fund holding more than 25% MLPs cannot qualify as a pass through registered investment company. As a result, these ETFs are structured as C-corps and incur a corporate income tax liability on unit value gains and K-1 profits. The non-availability of the tax pass through of a RIC produces the following results:
- An MLP ETF will accrue corporate income taxes at a 37% rate on gains in the portfolio. The accrued taxes are reflected in the reported NAV.
- The ETF return will lag the index return in a rising market as the accrued taxes are applied to the NAV. If MLP values fall, the ETF should not decline as fast as the index since accrued tax values will be recaptured.
- The ETF will typically carry a higher distribution yield than the index, since distributions pass through and yield is calculated on the lower, tax-adjusted NAV. For example, YMLP has a current distribution yield of 8.34% compared to a calculated 8.2% for the index.
The two Yorkville MLP ETFs have been designed to offer different return potential compared to the benchmark Alerian index and funds. If you want long term MLP exposure through ETFs, these funds deserve a look.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.