An MLP ETF Lottery Ticket

Thanks to tumbling oil prices, once beloved master limited partnerships (MLPs) and the exchange traded products that hold those securities have been among the most beaten up asset classes. Over the past six months, seven of the 20 worst-performing non-leveraged exchange traded products are MLP funds.

The Yorkville High Income MLP ETF YMLP is one of those ETFs, having shed more than half its over the past six months. With Friday's close just above a $4 handle, YMLP has the look of a lottery ticket-esque play on an MLP rebound. A lottery ticket with compensation as YMLP yields north of 28 percent on a trailing 12-month basis.

As Barron's reports, new research from Credit Suisse notes that MLPs “post gains in the year following points when the yield spread over the 10-year Treasury is more than 5 percentage points. It is just 3 basis points from that level now. He (analyst John Edwards) judges the index has 40% total return potential from  here.”

YMLP follows the “Solactive High Income MLP Index. The index is a rules-based benchmark designed to provide investors a means of tracking the performance of selected Master Limited Partnerships (“MLPs”) which are publicly traded on a U.S. securities exchange. The Index constituents must meet certain criteria relating to current distribution, coverage ratio of the distribution and the historical growth of the distribution,” according to Yorkville. 

While investors clearly like MLP ETFs, many are not aware until it is too late of a nasty surprise with some MLP funds. That is these ETFs are structured as C-corporations, meaning issuers can ding investors with high fees well in excess of the ETF's stated expense ratio.

As YMLP's homepage points out, the ETF has an annual expense ratio of 0.82 percent, but total fund operating expenses of 4.65 percent.

“YMLP averages a respectable 174,000 shares traded daily and the fund likely has appeal to those whom are interested in the MLP space and willing to sacrifice some volatility for potentially higher income. When we look at the portfolio breakdown within YMLP from a basket we see notable Small-Cap exposure (65%) rounded out by Micro-Cap exposure (35%), with the largest concentration in equity exposure in U.S. listed equities (75%) followed by lesser weightings to Europe (19%), said Street One Financial Vice President Paul Weisbruch in a note out last week.