Maybe Some Good News for MLP ETFs

There was once a school of thought that master limited partnerships were not sensitive to oil prices, but few would beg to differ that this income-generating asset class is sensitive to fluctuations in interest rates.

This year, the latter thesis is in tact while the former has been dealt a significant blow. Over the past 90 days, one of every nine of the worst-performing exchange traded products are MLP funds or exchange traded notes (ETNs). The goods news for disciples of this beloved income asset class is that, for patient investors, things could get better.

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.” 

There is no shortage of ways with which to play a potential MLP rebound with ETFs, but there are some funds with decent exposure to some of Credit Suisse's top picks, including Genesis Energy L.P. GEL, Tallgrass Energy Partners TEP and Energy Transfer Equity ETE. The bank also likes natural gas MLPs, including Spectra Energy Partners L.P. SEP, Kinder Morgan Inc. KMI, ONEOK Partners OKS and Magellan Midstream Partners L.P. MMP.

The JPMorgan Alerian MLP Index ETN AMJ, which we highlighted in late July, has combined 12.6 percent weight to Energy Transfer Equity, Magellean Midstream and ONEOK Partners.

AMJ's tempting yield of 4.7 percent, which is more than double the yield on U.S. Treasurys, is far from a free lunch. The ETN has a standard deviation of almost 16.6 percent, which is close to double that of S&P 500 ETFs. Plus, AMJ charges 0.85 percent per year, a high fee for a passively managed product.

The Global X MLP ETF MLPA is down 14.6 percent over the past 90 days, but the fund has a combined of 22 percent to Energy Transfer Equity, Magellan Midstream, ONEOK Partners, Genesis Energy and Spectra Energy. Like rival MLP ETFs, MLPA tempts on yield. The fund's dividend yield of 6.74 percent is more than triple the closing yield for 10-year Treasurys on Tuesday.

The Global X MLP & Energy Infrastructure ETF MLPX is another option to mull over. Several of the stocks mentioned by Credit Suisse combine for over 11 percent of the $104.7 million MLPX's weight. MLPX's dividend yield is less than 2.6 percent, but there is a good reason why and it is one investors should embrace.

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.

MLPX charges 0.45 percent per year and that is what investors should expect to pay because the most recent prospectus for the new ETF indicates the fund is registered under the Investment Company Act of 1940.

Fund companies can register MLP ETFs under the Investment Company Act as long as the ETFs are not 100 percent comprised of MLPs. MLPX will track the Solactive MLP & Energy Infrastructure Index, which is home to MLPs and firms that are comparable, but structured as traditional corporations.