Master Limited Partnerships: Yorkville's High Income MLP ETF Debuts
Source: ETF Daily News, Michael Johnson (3/13/12)
"The new ETF will seek to replicate an index that consists of Master Limited Partnerships (MLPs) generally engaged in the storage and transport of natural gas and petroleum-based fuels."
YMLP is the first ETF to be launched by Exchange-Traded Concepts, an entity that arose from a group of executives who had previously launched ETFs under the FaithShares brand. Those products, which offered exposure to portfolios constructed in compliance with the principles of various religions denominations, never generated much interest or assets. Upon shuttering the ETFs, the company transitioned to offer an "ETF-in-a-box" service that allows would-be issuers to accelerate the process of launching an ETF. Yorkville is the first to take advantage of the turnkey service, though several other companies are reportedly interested.
Receiving the required regulatory approvals required to launch an ETF independently can take years in the current environment, making alternatives such as ETC potentially intriguing to managers looking to fast track an entrance into the ETF space. AdvisorShares, one of the largest issuers of active ETFs, has also partnered with a number of different managers to bring ETFs to market over the last several years, including Cambria and Harvey Dent.
MLP ETPs In Focus
Interest in MLPs as a portfolio holding has skyrocketed in recent years, thanks in large part to the attractive yield opportunities in these securities. With the addition of YMLP there are now eight products in the MLPs ETFdb Category. But the Yorkville fund is just the second to be structured as an ETF; the remainder are exchange-traded notes (ETNs). UBS also offers inverse and leveraged MLP ETNs.
The concentration of ETNs in this space relates primarily to the tax nuances related to achieving MLP exposure through various structures. Due to restrictions on ownership in MLPs, ETFs that focus specifically on this segment of the market cannot elect to be treated as regulated investment companies, an election most ETFs make. According to the YMLP prospectus, the new fund will be treated as a "C" corporation for federal income tax purposes.
That makes YMLP's tax situation unique; it will be subject to federal income tax on taxable income, and as such will generally accrue a deferred tax liability when the underlying securities appreciate. Partially offsetting that liability is the ability to treat some distributions as return of capital–which comes with a favorable tax treatment.
Many investors prefer to achieve exposure to MLPs through ETNs, since that structure doesn't involve the accrual of a tax liability related to appreciation of the underlying securities. The most popular MLP exchange-traded product, the JP Morgan Alerian MLP Index ETN (NYSEArca:AMJ), is structures as a note; that product has more than $4.2 billion in assets. The Alerian MLP ETF (NYSEArca:AMLP) was previously the only exchange-traded fund targeting MLPs; that fund has gathered nearly $3 billion in assets [see Seven Surprising ETF Performance Comparisons].
The taxation of MLP ETFs and ETNs is a complex issue that doesn't have an easy answer; the relative benefits of each approach depend on the economic environment, individual tax circumstances, and the type of account in which the position is held [see MLP ETFs: Fact And Fiction].
YMLP charges an expense ratio of 0.82%, which makes it the cheapest offering in the space. Other MLP ETPs generally charge 0.85%.
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