One of the lesser-known categories of exchange-traded funds (ETFs) is that of MLP ETFs. These ETFs invest in master limited partnerships (MLPs), investment structures that are centered on the transport of resources such as oil and natural gas. This ETF category has attracted the attention of investors primarily due to the fact that they often provide attractive dividends, appealing to investors seeking steady above-average yields. Because of the business model employed by MLPs, which is focused on providing pipelines, storage facilities and other infrastructure components, MLPs are less vulnerable to the ups and downs of commodity prices and are thus able to capture a more stable stream of revenues.
MLP ETFs can also be tax-advantaged investments, since investing in MLPs through an ETF rather than directly investing in one or more MLPs avoids the investor being designated a limited partner and having to file a K-1 form for tax purposes. MLP ETFs also offer a means of diversifying an investment portfolio that is otherwise a mostly traditional equity portfolio, because there tends to be little correlation between the performance of MLPs and that of the overall stock market.
When making a choice among MLP ETFs, investors have to consider the three different structures available: open-ended funds, C-corporations and exchange-traded notes (ETNs). Generally, the ETN-structured ETFs are more appealing to investors using tax-deferred investment accounts and who have shorter investment time horizons, while the more traditional C-corporation or open-ended fund ETFs are better suited to investors with longer time horizons for their investments and who are not using tax-deferred accounts to invest in ETFs.
As is the case with most categories of ETFs, the approximately two dozen fund choices available in this category are mostly passive index-tracking funds. The first pure MLP play actively managed ETF did not come along until October 2014, when Infrastructure Capital Advisors introduced the InfraCap MLP ETF (NYSEARCA: AMZA).
InfraCap MLP ETF
The InfraCap MLP ETF was launched in late 2014 by Infrastructure Capital Advisors. It has attracted $128.5 million in total assets under management (AUM) as of Novemebr 2016, making it relatively small in comparison to the most widely held MLP ETF, the Alerian MLP ETF (NYSEARCA: AMLP) with its $9.1 billion in assets.The Infracap MLP ETF is structured as a C-corporation, which means that it is taxed as a corporation at the fund level, with the benefit of its distributions usually being tax deferred. The C-corporation structure also allows the fund to fully allocate its assets to MLPs, whereas open-ended funds can only allocate a maximum of 25% of their assets directly to MLPs. This actively managed ETF has 39 long and 96 short positions in MLPs that transport, store or process energy products. The fund's top three holdings are Energy Transfer Partners LP (NYSE: ETP), Williams Partners LP (NYSE: WPZ) and Energy Transfer Equity LP (NYSE: ETE). The expense ratio for this ETF is 1.11%, which is predictably higher than the energy limited partnership category average of 0.71%, as this fund is actively managed.
The one-year return for AMZA is negative 1.2%, underperforming the category average of 4.37%. However, as of November 2016, year-to-date the fund returned 20.16%, significantly outperforming the category average at 16.73%, reflecting its performance since the upturn in oil prices. Its three-month performance at negative 0.80% is in line with the category average. The 12-month dividend yield for the fund was 19.57%.
Comparison to other MLP ETFs
The most widely held MLP ETF, the Alerian MLP ETF, a passive, index-tracking fund, shows a one-year return of 6.02% faring much better than the InfraCap MLP ETF. However, its YTD return of 11.56%, three-month return of negative 1.55% lags far behind AMZA's on both counts. The 12-month yield for the Alerian MLP is 8.76%, too is substantially less than that for AMZA.
The most direct competitor of the InfraCap MLP ETF is the First Trust North American Energy Infrastructure (NYSEARCA: EMLP), another actively managed ETF in the MLP category. This ETF differs from the InfraCap MLP ETF in that it is less of a pure MLP play due to its being structured as an open-ended fund and thereby limited in the percentage of assets it can directly allocate to MLPs. In addition to MLPs, it also invests in pipeline and utility corporations, Canadian firms that were formerly royalty trusts and institutional MLP shares that are issued by MLP affiliates. The First Trust North American Energy Infrastructure ETF far outperforms the InfraCap MLP ETF with its one-year return of 14.58% and its YTD return (as of November 2016) of positive 22.39%. It underperforms AMZA on a three-month basis, with a return of negative 3.15%. The 12-month dividend yield of EMLP is 3.78%, much lower than the AMZA yield of 19.75%.