Eric Dutram: MLP ETF investing has surged in popularity in recent years as a host of new products hit the space. Funds now exist that target various subsets of the Master Limited Partnership world with ones that zero in on high yield, natural gas, infrastructure, among others.
However, there has been one corner of the MLP world that has remained strangely overlooked despite the clear interest by investors for the space; small caps. This looks to change now though, as Global X has just released a Junior MLP ETF (NYSEARCA:MLPJ) which looks to offer up first of its kind exposure to pint-sized MLPs in exchange-traded fund form.
This brand new ETF tracks the Solactive Junior MLP Index, giving exposure to small cap MLPs. The product has 25 stocks in its basket, and charges investors 75 basis points a year in fees for its exposure.
In terms of the basket, exploration and production accounts for just under 44%, trailed closely by energy transportation & storage which makes up about 40% of assets. Top holdings are all below 7% of assets, with Suburban Propane Partners (NYSE:SPH), Northern Tier Energy (NYSE:NTI), and Alliance Resources Partners (NASDAQ:ARLP) rounding out the top three and all accounting for at least 6.5% of the ETF each.
Why Small Caps?
Small cap MLPs could be an interesting play at this time as they could allow investors to still play solid trends in the space, without purchasing some of the more bid up names in the large cap domain. After all, these large caps have seen huge levels of inflows in the past few years—thanks in part to ETF demand—so small caps may be better positioned for the road ahead (read Three Impressive Small Cap Dividend ETFs).
This particular ETF also looks to be more focused in on exploration and processing, something that investors don’t really see in large cap products. In these funds, like with (NYSEARCA:MLPA) and (NYSEARCA:AMLP), the focus is much more on the ‘toll-road’ business model which is arguably less prone to volatility than what investors might see in MLPJ.
MLPJ may also be an interesting play for those seeking a wave of M&A activity in the space. As companies look to consolidate, the move towards small caps in order to shore up supply lines or explore for more hydrocarbons could become a very popular theme in 2013 in beyond.
“We are pleased to offer the first and only ETF that provides access to the rapidly growing junior MLP market,” said Bruno del Ama, chief executive officer of Global X Funds, in a press release. “MLPJ uniquely meets investor demand for both income and growth in the energy space.”
The boom in the MLP market has definitely transferred over into the ETF world as well, as many MLP products are extremely popular. In fact, only four have less than $50 million in total assets, while on the flipside, two have at least one billion in AUM and two more have at least $300 million in assets.
Clearly, given the low level of competition in the small cap space, Global X could find a way to establish a reasonable level of assets in the market. It is worth pointing out though, that their other MLP ETF, MLPA, is one of the few that doesn’t have a big following, so it is by no means a sure thing (also read The Truth about Low Volume ETFs).
Yet given the huge demand for MLP products and the potential for small caps as acquisition targets, this could definitely change for MLPJ, meaning that Global X could certainly have a winner on its hands with its latest commodity focused ETF.
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