Direxion Rolls Out High Income MLP ETF [ETF Series Solutions, Alerian Mlp]

How Does It Fit in a Portfolio?

This ETF could be an interesting choice for investors seeking broad exposure to the MLP space with a focus on income. Moreover, the use of an equal weight strategy could keep the portfolio balanced among various companies and help in avoiding heavy concentration risk.

The product is reasonably priced at 65 bps, though not extremely cheap, as the average expense ratio of the MLP ETFs space stands at 80 bps a year.  ZMLP is also one of the highest income generating instruments in the space. Hence, the fund carries the potential to attract investors (read: Boost Income and Growth with MLP ETFs).

Investors should realize that the product’s major focus on smaller caps equities will likely help it to trend higher in a reviving U.S. economy and deliver increased capital appreciation along with higher income payouts. All these could make ZMLP an interesting choice.

 Can it Succeed? 

At present, the MLP ETF space is overcrowded with Alerian MLP ETF (AMLP) topping the list having amassed about $7.58 billion in assets. Alerian MLP Index ETN (AMJ) and E-TRACS Alerian MLP Infrastructure Index (MLPI) round the top three positions with, respectively, $5.8 billion and $1.6 billion in assets. This will make it somewhat hard for ZMLP to attract huge onlookers without some solid outperformance.

One good point is that these three have expense ratios at 0.85% which is way higher than what the newly launched ZMLP is charging now. Also, AMLP has some significant concentration risks in its top 10 holdings.

And when it comes to dividend yield, ZMLP might steal the show in the space because only one product Cushing MLP High Income Index ETN (MLPY) provides a better yield at 7.46%.

Apart from MLPY, at present no other MLP product can beat the yield of ZMLP. So, it is pretty clear that the new Direxion product will be contending its peers primarily on yield and to some extent on price and equal-weight strategy (read:High Dividend ETFs to Buy Even If the Fed Tapers).

Bottom Line

We expect the segment and the newly introduced fund to hold up well in 2014. Investors worrying about rate hikes should note that the Fed’s decision for a further taper in 2014 will depend on whether inflation and employment perk up at a desired pace.

That means that a gradual interest rate rise in a modestly inflationary environment may not prove that bad for the rate-sensitive sectors, suggesting that investors may want to take a closer look at this interesting corner of the market for picks in 2014.

This article is brought to you courtesy of Eric Dutram.

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