Yorkville Takes On AMLP With New MLP ETF
March 13, 2012
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Yorkville ETF Advisors, a New York-based asset manager, today launched an ETF that invests in commodities-based master limited partnerships that’s a touch cheaper than competing funds in the space. The launch is also the first backed by Exchange Traded Concepts using its “ETF-In-A-Box Solution.”
The Yorkville High Income MLP ETF (NYSEArca: YMLP) joins behemoths in the space, including the $4.19 billion JPMorgan Alerian MLP ETN (NYSEArca: AMJ) and ALPS’ $2.81 billion Alerian MLP ETF (NYSEArca: AMLP). But Yorkville’s YMLP has an expense ratio of 0.82 percent, less than the 0.85 percent AMJ and AMLP charge.
The Yorkville MLP ETF tracks a Solactive index that taps into commodities-based MLPs such as those focused on exploration and production of oil and natural gas, as well as extraction of minerals and shipping of various types of fuels and chemicals, offering a twist that differentiates it, Yorkville officials said.
They say YMLP’s portfolio doesn’t overlap with AMLP’s infrastructure-focused basket of partnership shares in oil and gas pipeline companies. As such, the fund could be used to tap into the income MLPs generate or to complement exposure to the MLP space rather than to replace an allocation to AMLP.
More broadly, Yorkville hopes YMLP gets a piece of the enormous investor appetite for income-generating strategies at a time of ultra-low interest rates following the collapse of financial markets in 2008. MLPs are well known for the steady dividends they deliver, and their popularity is clear in the assets AMLP and AMJ have gathered.
MLPs are U.S. energy assets created back in the mid-1980s, and have been used by many as “safety” investments, much like an allocation to U.S. Treasurys, Yorkville’s portfolio manager and the brains behind the strategy Darren Schuringa said in a telephone interview.
Still, MLPs have been delivering higher yields than other income asset classes such as REITs and utilities, and have far outpaced equities portfolios in recent years, Schuringa said.
Commodities Vs. Infrastructure
“We looked at every single MLP in the market, and we identified two major segments: commodities-based and infrastructure-based MLPs,” Schuringa said. “Commodities-based MLPs are more favorable than infrastructure ones because their distributions grow faster and they generate higher yields,” he said.
To that point, Schuringa noted that the index underlying AMLP is yielding from 5.5 to 6.5 percent a year, while the Solactive benchmark underpinning YMLP’s strategy yields almost as much as 9 percent.
“Half of this asset class is overlooked,” Schuringa said, adding that there are no products that focus on the commodities-based MLP segment. “And the risk/return profile is the same for commodities and infrastructure MLPs.”
Does Tracking Error Matter?
MLP-based ETFs are taxed as corporations, unlike most other ETFs, meaning that they could be susceptible to double taxation: The fund has to pay government taxes as each partnership pays out before it can pay shareholders.
Even as distributions to investors in many cases are deemed nontaxable return of capital, the complex tax structure that is based on a daily accrual of tax liabilities could affect returns and cause the fund’s performance to diverge from its benchmark.
It’s that very tax structure that caused AMLP to end 2011 with a tracking error that neared 7 percent, the highest in a pool of more than 700 ETFs surveyed by Morgan Stanley.
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