A combination of the search for yield, driven by the ongoing stimulus campaigns of the Federal Reserve and other global central bankers, and a renaissance in U.S. energy production has created a significant increase in the interest in master limited partnerships (MLPs) due to their yield oriented characteristics. Historically, however, most MLP based funds have focused on the energy sector, but two new exchange traded notes (ETNs) launched under the ETRACS brand from UBS are changing the landscape.
The Underlying Index
The two new ETNs, both of which were launched last month, are designed to track the Wells Fargo MLP Ex-Energy Index, which measures the performance of publicly traded non-energy MLPs. As it turns out, the index is dominated by financial and real estate related issuers.
- The Wells Fargo MLP Ex-Energy Index follows a modified market cap weighting methodology (there is a 10% limit on any individual issuer) and includes exchange-listed non-energy MLPs that meet certain criteria. Currently, the index consists of 18 stocks, including KKR & Co LP (KKR), Blackstone Group LP (BX), and Icahn Enterprises LP (IEP).
The Two New ETNs
- The ETRACS Wells Fargo MLP Ex-Energy ETN was the first of ETRACS’ ETFs to track the index. It began trading on June 10, 2014 under the ticker symbol “FMLP.” This ETN seeks to pay variable monthly coupons linked to the cash distributions of the stocks it owns, less fees of 85 basis points per year.
- For investors interested in additional leverage, ETRACS launched a second Wells Fargo MLP Ex-Energy-based ETN: The ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN, which debuted on June 25, 2014 and trades under the ticker symbol “LMLP.” This ETN is designed to be linked to two times the performance of the Wells Fargo MLP Ex-Energy Index, and it will aim to pay a variable monthly coupon linked to two times the cash distributions of the stocks it owns.
Much of the gains achieved by MLPs thus far in 2014 are attributable to the U.S. shale boom. Investors who are looking for a “pure play” on the tax advantages offered by the MLP structure but who wish to avoid the company-specific risk of investing in a single MLP now have a pair of indexed-ETN options to choose from. ETRACS’ “FMLP” is indexed to the performance of the Wells Fargo MLP Ex-Energy Index, while the newly launched “LMLP” tracks the same index but leverages itself to double the returns – be they profits or losses. These products may be well suited for investors who are looking for high levels of income in this era of near-zero interest rates, but beware of the concentration within the financial sector.
For more information about these new ETNs, visit etracs.ubs.com.