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  • Junior Energy MLPs Ride High On Natural Gas! 0 comments
    May 23, 2013 6:49 AM

    MLPS if expanded spells master limited partnerships and are traded like securities on a stock exchange. They are associated with generation of income that is bestowed with a special tax advantage; shareholders are given the entire amount of profit (every three months) without any tax deductions and up-to 90 % of the distribution made is considered a return on capital initially invested and therefore not taxed at the time of receipt.

    Small Cap MLP funds compliment the overall Energy MLP exposure owing to the potential value growth they bring to the portfolio. These ETFs alongside being attuned to a valid Junior MLP Index use a standard basket methodology in terms of holdings, resulting in a wide spectrum play on the entire Junior Energy MLP sector.

    The natural gas industry alone is growing at a healthy rate of 5% in America, The resources and the transportation equity from the sector includes a handful of small cap energy MLPs that for some may be future gold mines

    These are interesting sources of income whether held for long periods or a short term because of the attractive yields. In fact the law of compounding can be applied and this 80 - 90 % of profit can be re invested several cycles until the investment is liquidised. The remaining 10 or 20 % whatever the case is taxed in a normal way.

    The energy sector such as exploration work and oil & natural gas producers and its sub sectors like pipeline operatives and tanker firms etc. are presented with an increasing number of MLPS especially since last twenty years or more. According to a report published last year by the International Energy Association United States will be the largest producer of oil in the next four years.

    U.S already produces an enormous quantity of natural gas and therefore its price in United States is almost one third when compared to the price of same unit of gas in European and Asian continent. American Companies focussed on exploration and production activities like Atlas resource partners that have a stake in more than 8000 natural gas and oil wells may profit in a big way with the nation coming forward as a leading producer and exporter.

    A company needs to be part of a limited list of businesses and generating at least 90 % of income from that operation to qualify as a master limited partnership.

    Further in a low interest rate scenario or one where an economy is uncertain about its performance, investors looking to generate money (including the retirees) may opt for Junior MLP Mutual fund, but the ETF route is most suitable due to lower expenses and higher liquidity features.

    In the energy sector operations like pipeline networks for oil and gas have very little connection with the economy and market dynamics and various indices. Talking in length about a junior /small cap MLP heightens its advantages over the ones focussed on large cap firms. In terms of yields the former owns clear precedence with records of around 8 % Vis `a Vis the latter's' 6 %.

    Junior MLP ETF is valued at a reasonable price because it has not received enough emphasis by investors so far.

    One way to tackle the volatility presented by the small cap MLPS is to diversify through ETFs containing 25 to 30 securities and this will not only reduce single company specific risk but also provide enough exposure with the sub sectors. The weight age must be balanced with at least 50% to large cap equity of Energy producers and transporters.

    Global X Junior MLP ETF [MLPJ] seeks a yield that corresponds proportionally to the price and yield performance of its underlying index; Solactive Junior MLP Index. The benchmark is closest to being a pure play on the small cap stocks among the United States Master Limited Partnerships and holds a close to more than 50% of its close to ten million dollars of assets in the said Junior Energy MLP being the investment focus.

    According to Global X fund's CEO Bruno Del Ama; the MLPS linked to (energy) exploration and production will be the leader in terms of growth levels in the master limited partnerships segment.

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