Seeking Alpha

An Overview Of The Master Limited Partnership ETF Universe

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Includes: AMLP, AMZA, EMLP, MLPA, MLPX
by: Derek Heckman
Summary

MLP ETFs are a valuable addition to investment portfolios and provide several benefits, including diversification and return enhancement.

MLP ETFs pay higher cash distributions than other assets, provide inflation protection, and have a low correlation to other portfolio assets.

AMLP, the largest MLP ETF, is heavily-traded and offers a strong yield.

AMZA has the best yield of all MLP ETFs but suffers from a high expense ratio due to its organization as a C-corporation.

Master Limited Partnerships (MLPs) are a valuable addition to investment portfolios and provide several benefits, including diversification and return enhancement. For passive investors and those concerned with diversification, there are several ETFs available that provide broad access to this corner of the commodities industry. This article provides a short summary of the MLP ETF investment space. First, I will explain why I include this asset class in my own portfolio. Finally, I will provide readers with an investable set of MLP ETF options from which to choose, based on your own risk and return constraints.

Rationale for Inclusion

I am currently long the InfraCap MLP ETF (AMZA). I originally added this fund to my investment portfolio for two reasons: 1. Its high distribution yield and 2. Most of the fund's distributions are classified as non-taxable, non-dividend return of capital distributions.

However, high dividend yields and favorable tax treatment of the distributions are not the only reasons why investors choose to invest in MLP ETFs. Two other very valuable benefits include diversification and return enhancement.

The fund website for the ALPS Alerian MLP ETF (NYSEARCA:AMLP) lists several benefits of MLPs, including:

  • Greater cash distributions to investors due to no taxes at the entity (partnership) level.
  • Direct access to physical U.S. oil and gas infrastructure assets.
  • Inflation protection: These assets produce income that rises with inflation.
  • "Low correlations with other yield-oriented investments such as bonds and utilities" (AMLP product page).

Additionally, David Swensen, manager of the Yale University endowment, lists diversification and return enhancement as two primary benefits of investing in oil and gas assets. In his 2009 book, Pioneering Portfolio Management, Swensen states that energy investments have a low correlation to traditional securities such as stocks and bonds (diversification) while still providing equity-like returns (return enhancement).

Investable MLP Options

The first step in identifying an appropriate MLP ETF investment for your portfolio is to determine how many such options exist. To do this, I consulted the "MLP ETF List" compiled by ETFdb.com. I used the following criteria to select a group of MLP ETFs for comparison purposes:

  • Net assets over $400 million.

  • Only MLP-focused ETFs are included, which excludes two energy and infrastructure funds: Global X MLP & Energy Infrastructure ETF (MLPX) and First Trust North American Energy Infrastructure Fund (EMLP).

  • All ETNs are excluded because they are debt instruments tied to an index and do not hold any physical assets. (My personal preference is to only invest in funds that actually hold the related physical asset.)

ETFdb MLP ETF screener results

These criteria leave us with three investable MLP ETF options (the website for each is linked to the full fund name): AMZA (InfraCap MLP ETF), MLPA (Global X MLP ETF), and AMLP (Alerian MLP ETF), which are compared and discussed in the following sections.

Comparison of the Investable MLP ETF Space

All three of these MLP ETFs invest primarily in Master Limited Partnerships (MLPs) that are involved in "midstream" (i.e. transportation, storage, and processing) oil and gas activities. Each ETF's holdings contain primarily MLPs, with only 7-10 oil and gas-related common stocks present among these three funds' holdings.

A comparison chart of each fund's financial and trading information is presented below (sorted by expense ratio):

MLP ETF Comparison table

*All fund data courtesy of each fund's webpage (referenced above). Dividend yield figures were calculated by the author using the trailing 12 months' distributions from each fund's website, divided by the current trading price of each fund as provided by Yahoo! Finance as of 12:30 pm CDT, April 11, 2019.

AMLP clearly stands out as the oldest fund, the largest fund (with just over $9 billion in net assets), and also the most liquid with an average of almost 17 million shares traded daily. In terms of yield, AMZA is the clear winner, which reinforces my prior decision to select AMZA for my own portfolio because of its superior yield. AMLP and MLPA both distribute dividends quarterly, while AMZA provides monthly distributions.

In terms of expense ratio, MLPA's is almost half of AMLP's, at 0.45% and 0.85%, respectively. Notably, AMZA records the worse expense ratio of the group at 2.4%. To determine why this is so high, you would need to read the fund's prospectus and have a working knowledge of income tax law. AMZA's stated expense ratio includes both a management fee (which is the figure in the chart for MLPA and AMLP) of 0.95% as well as a 1.45% portion for interest expense and deferred income tax expense. Because AMZA is organized as a C-corporation (like Google (GOOG)(GOOGL)), it must estimate its corporate income tax due for the current year and include this as an expense on its balance sheet. The fact that AMZA has included this additional figure in the calculation of its expense ratio appropriately reflects a future amount that the fund will have to pay out for income taxes.

In considering this fact about AMZA's tax liabilities, it is important to note here that when forecasting the fund's returns in my own portfolio, I subtract the expense ratio from the yield to arrive at an adjusted dividend yield figure as shown below:

20.53% dividend yield - 2.4% expense ratio = 18.13% adjusted dividend yield

Even when considering AMZA's oversized expense ratio (due to accrued tax liabilities), the fund has a superior yield, more than doubling MLPA's 8.47% yield!

Return Comparison

Next, we turn our attention to each fund's return performance. Please note that because AMZA was established in October 2014, 5-year return information is not yet available. This information will be provided when AMZA files its annual report for the current fiscal year ending October 31, 2019 (generally filed three months later in January of the following year).

All return data shown below is provided by Global X, Alerian, and InfraCap, respectively:

MLPA - Global X MLP ETF returns

MLPA Returns chart

AMLP - Alerian MLP ETF returns

AMLP Returns chart

AMZA - InfraCap MLP ETF returns

AMZA Returns chart

As you can see, the returns of MLPA and AMLP are quite similar, only differing in AMLP's superior return since inception and its -3.54% 5-year return (a loss), which was slightly better than MLPA's 5-year loss of -4.46%.

Finally, AMZA appears to have missed the mark, as it currently posts a negative return since inception of -13.47%. Its 1-year return is similar to the other two funds but AMZA posts a superior 3-year return of 6.77%, the best 3-year performance of all funds profiled.

Summary

As we have seen, MLP ETFs (which invest in oil and gas commodity assets) are a valuable addition to investment portfolios and provide several benefits, including diversification and return enhancement. These ETFs generally pay higher cash distributions than other assets, provide inflation protection, have a low correlation to other assets such as equities and bonds. Of the three ETFs identified, AMLP is the largest and most heavily-traded, with a dividend yield similar to the ETF with the lowest expense ratio in the group: MLPA. AMZA, the youngest fund in the group, provides the highest dividend yield at 20.53% but also sticks investors with a higher expense ratio due to the fund's tax status as a C-corporation. In terms of return, while quite similar to MLPA's numbers, AMLP is the clear winner in terms of return; both funds are followed by AMZA, which finishes the return race in 3rd place.

Disclosure: I am/we are long AMZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.