Eric Dutram: With the fiscal cliff resolved, investors once again starting buying high yielding products in droves. MLPs were no exception to this trend, and have gotten off to a roaring start in 2013.
In fact, many MLP ETF products have easily outpaced the market during the year-to-date period, and several have actually put up double digit gains in the time frame. In this type of environment, many ETF issuers have been quick to launch new funds as both (IMLP) and (MLPJ) have both hit the market since the 1st.
However, it doesn’t appear as if the trend is slowing down by any means, as upstart provider Yorkville has now joined the 2013 ETF launch party with its own High Income Infrastructure MLP ETF (NYSEARCA:YMLI). This product is entering a crowded space and could face some difficulty in accumulating assets, but a relatively unique technique could assist the ETF in becoming more popular.
YMLI in focus
The new ETF looks to hold about 25 MLPs in its basket, while utilizing an equal weighting methodology. This ensures that no one MLP dominates the risk return profile of the fund and that assets are well spread out across the space.
Overall, this results in a portfolio that is tilted towards firms in the ‘gathering and processing’ (32%) aspect of the MLP world, while natural gas pipelines (32%) also make up a big chunk of the assets. Rounding out the portfolio is a 16% allocation to refined product pipelines, 12% to crude oil pipelines, and then 8% to ‘general partners’.
At time of writing, DCP Midstream Partners (DPM), Crosstex Energy (XTEX), and Sunoco Logistics (SXL) take the top three spots. Obviously with the equal weighting this means that they do not account for that big of a chunk, combining for about 9% of total assets (watch MLP ETFs Surging to Start 2013).
It should also be noted that due to the fund’s structure as a C-Corporation, a K-1 is not necessary for this ETF. This means that 1099 reporting is fine, while dividends will be qualified.
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. Additionally, the use of an equal weight strategy could help to keep the portfolio balanced among the various subsectors, and prevent a heavy concentration.
Investors should realize that the product is based on the Solactive High Income Infrastructure MLP index, which was built and designed to be investable. This is evident by the focus of the benchmark on three key criteria; current yield, coverage ratio, and distribution growth (see Oil Bull Market Is No Place For MLP ETF Investors).
This could result in the product zeroing in on higher income producing MLPs, on average, while it could also tilt it to those that have increasing income payouts. The safety could also be higher, thanks to the coverage ratio stipulation, so this could make YMLI an interesting choice.
Still, the ETF is likely to face low trading volumes at least to start, so bid ask spreads could be a bit wide. Additionally, the fund is just middle of the road from an expense ratio perspective at 82 basis points a year, so it is unlikely to attract (or repel) investors based on this factor alone.
Can it succeed?
The MLP ETF space is extremely crowded and there are a wide number of funds in the space. This will make it somewhat difficult for YMLI to develop a big following without some solid outperformance or a truly high yield.
In fact, two MLP products have more than $5 billion in AUM each—(NYSEARCA:AMJ) and (NYSEARCA:AMLP) — so the space can be considered somewhat top heavy. Yorkville’s other fund though, (NYSEARCA:YMLP), has managed to buck the trend and see over $130 million in assets (seeYorkville MLP ETF (YMLP) Debuts).
This is a pretty respectable figure for a company that (at the time) didn’t have a single other fund to its name. Thanks to this solid performance by YMLP, one has to imagine that YMLI could do something similar in terms of popularity, especially if current bullish trends in the broad MLP ETF space hold.