- ETRACS has an extensive array of 2x leveraged, high-yield ETNs.
- The ETRACS line up covers most of the high-yield asset class.
- The latest addition adds non-energy MLPs to the mix.
ETRACS continues to expand its line of high-yield ETNs (Exchange Traded Notes) with the addition of ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (NYSEARCA:LMLP). This 2x leveraged product is linked to the performance of the Wells Fargo Master Limited Partnership Ex-Energy Index. Its yield is anticipated to come in near 14-15%.
Those keeping score at home are quite familiar with ETRACS's stable of leveraged products linked to high-yield income sectors. This one adds 2x exposure to non-energy master limited partnerships to that list. It joins a lineup that includes 2x leveraged ETNs tracking business development companies (NYSEARCA:BDCL), with a 14.7% yield; closed-end funds (NYSEARCA:CEFL), 16.1%; domestic dividend equities from the Dow (NYSEARCA:DVYL), 6.7%, and the S&P (NYSEARCA:SDYL), 5.0%; energy and infrastructure MLPs (NYSEARCA:MLPL), 8.0%; mortgage REITs (NYSEARCA:MORL), 19.8%; international real estate (NYSEARCA:RWXL), 7.1%; and a diversified high income ETN that combines several of these asset classes along with some additions (NYSEARCA:DVHL),12.2%.
LMLP's index is modified capitalization-weighted. It's modified such that no single component exceeds 10% of holdings. The index currently comprises 17 constituents. The 5 largest holdings are pushing through that 10% limit and the next 3 fall less than a percentage point short, so it's currently quite close to equal weighted. The top 10 holdings (shown in table) make up 89.6% of the index.
LMLP Top Ten Holdings
KKR & Co. LP
Blackstone Group LP
Carlyle Group LP
Icahn Enterprises LP
Och-Ziff Capital Management Group LLC
Apollo Global Management LLC
Oaktree Capital Management LLC
Fortress Investment Group LLC
Cedar Fair LP
The index has no performance history as it was created April 1, 2014.
Those familiar with ETNs should be aware of how these products differ from ETFs. They are, as the name states, credit instruments: "senior, unsecured, unsubordinated debt securities" according to ETRACS. There is no guaranteed coupon rate. Payment is linked to 2x the cash distributions of the index constituents less a tracking fee of 0.85%. ETRACS states that the index yield as of June 20, 2014 is 15.24%, which would predict a yield of slightly more than 14%.
Leverage is reset monthly. It is not clear to me how frequently the index is rebalanced.
Anyone considering this, or any of the other ETNs mentioned above, should thoroughly read through the sponsor's statement of risks. Some are obvious, but others may be less apparent due to the structure of the ETN. Any savvy investor surely understands that 2x leverage comes with leverage risk. Upside and distribution returns are potentially doubled, but so are downside moves. In addition, there is the fact that this product is an unsecured debt obligation. Thus, it depends on the creditworthiness of the issuer, UBS, and that creditworthiness can affect its market value.
Yet another consideration may be tax treatment. ETRACS notes that "significant aspects of the tax treatment … are uncertain." However, for most US investors it would seem that all payments would be taxed as ordinary income.
ETRACS leveraged ETNs have proven to be very popular vehicles for investors looking for ultra-high yields. This addition to that array of products seems like a natural extension of this popular line. Many income investors hold one or more of the ETN's index components. This ETN provides a path to diversified exposure to the asset class. For those interested in that exposure but unwilling to take on the leverage risk, ETRACS has also introduced an unlevered ETN tracking the same index: ETRACS Wells Fargo MLP Ex-Energy ETN (NYSEARCA:FMLP).
Disclosure: The author is long CEFL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.