Benefiting from the ever-persisting low interest rate environment and overall rising energy sector activity, master limited partnerships, or MLPs ,continue to attract investor interest. And what’s not to like? As pass-through entities, MLPs feature high tax-deferred distributions—often in the 5% to 7% range—as well as a hefty amount of capital appreciation.
It’s no wonder why investors—both retail and institutional—have been drawn to them like a moth to a flame. Increasingly, investors have been choosing index funds and ETFs to get their MLP fix. However, just as there are now well over 100 different MLPs, there are multiple indexes that track these firms – each with their own nuances and differences. In fact, there are more than 65 ETFs, ETN, CEFs and mutual funds focused on MLP investing. So, how does an investor pick which one would suit their portfolio best? Here’s CommodityHQ’s guide to some of the biggest and most popular MLP indexes.
Alerian MLP Index
When it comes to MLPs, the benchmark index in the sector has to be the Alerian MLP Index (AMZ,) with over $21 billion dollars tied to the vehicles tracking the index. That index is made-up of 50 prominent large- and mid-cap energy master limited partnerships and captures approximately 75% of available market capitalization of the asset class.
In order to be included in the benchmark, an MLP must be engaged in the transportation, storage, processing, or production of energy commodities. There are several MLPs that exist outside of the energy space, such as timber and financial firms. However, when it comes the Alerian, we’re talking energy only.
In addition, the Alerian index screens for certain distribution/dividend requirements. MLPs must have had positive distributable cash flows for the previous four quarters combined, and they have to have handed those cash flows back to investors. MLPs in the Alerian must have a distribution policy intended to maintain or increase distributions over time and must have maintained or grown their distributions quarter-over-quarter for at least one of the previous two quarters. Given these requirements, this Alerian index features many of the largest well-known blue chip MLPs like Enterprise Products Partners LP (EPD) and Magellan Midstream Partners LP (MMP).
As for buying the Alerian, the Alerian MLP ETF (AMLP) is the most popular way for investors to get their fix. However, the JPMorgan Alerian MLP ETN (AMJ) and UBS ETRACS Alerian MLP ETN (AMU) are other popular options to play the benchmark.
Alerian MLP Infrastructure Index
Although MLPs come in many flavors, when most investors think of them they think of pipelines. However, the bread-n-butter Alerian index can include energy-focused MLPs that aren’t just midstream firms. If you don’t want energy production firms or coal MLPs and solely want to focus on America’s midstream infrastructure, then the Alerian MLP Infrastructure Index (AMZI) is for you.
The index tracks only those firms that earn the majority of their cash flow from the transportation, storage, and processing of energy commodities, which means we’re looking at pipeline companies, those with gathering assets or natural gas fractionation capacity. Nothing else. That makes the AMZI a pure-play on the thousands of miles worth of pipelines crisscrossing North America. Like its sister index, the Alerian MLP Infrastructure features the same distribution quality requirements. However, the focus solely on midstream firms cuts the number of included firms down to just 25 [see also How Are MLPs Taxed?].
The easiest way to play the AMZI is through the UBS ETRACS Alerian MLP Infrastructure ETN (MLPI).
The Cushing 30 MLP Index
Developed by Cushing Asset Management- a money manager focuses on MLPs- the Cushing 30 MLP is probably the best known index outside of the Alerian.
And like the Alerian Infrastructure index, the Cushing 30 focuses strictly on midstream firms- pipeline, gathering and storage operators. The kicker is that the Cushing 30 Index is equally-weighted [see also 25 Ways To Invest In Crude Oil].
Most indices will use market-cap weighting to rank their constituents. Larger stocks get more share of the index, smaller ones less. However, some evidence suggests that doing this actually hurts investors. By equally weighting its LP holdings, the Cushing hopes to overcome the phenomena of overweighting potentially overvalued stocks and underweighting potentially undervalued stocks. Over the longer term, that balance should produce a better return for portfolios. And there is some evidence that equal weighting is the best way to go. However, it does not work in all markets.
Cushing uses a formula-based, proprietary valuation methodology to rank MLPs for possible inclusion in the Index. Other requirements include a steady distribution policy, public float size and MLPs must have market capitalization of at least $500 million. The index is rebalanced quarterly to keep its equal weighting and kick-out/add firms.
Playing the Cushing 30 can be done via Credit Suisse Equal Weight MLP ETN (MLPN), which tracks the index.
The S&P MLP Index
As one of the leading index providers, Standard & Poor’s also features one of the better known MLP indices, which is aptly named the S&P MLP Index (SPMLP).
The SPMLP index is designed to provide exposure to leading partnerships that are classified in the Global Industry Classification Standard (GICS) Energy and GICS Gas Utilities Industries. The GICS is just a fancy way of saying sectors and it’s the framework that most index providers and money managers use to classify a stock or company.
The index includes both master limited partnerships and publicly traded limited liability companies (LLCs), which are basically are MLPs and share the same tax benefits, but with slightly different legalese attached to them. These include such firms as upstream MLP Linn Energy (LINE). The index also has portfolio weighting stipulations so that no single MLP can account for more than 15% of the benchmark. Like the benchmark Alerian, the S&P MLP focuses on large- & mid-cap MLPs across the entire energy value chain.
That means it holds more than just midstream firms.
The appeal of using the S&P MLP could be synergies across your portfolio. After all, you probably own funds tied to S&P’s other major indexes. Adding the S&P MLP can seem like a drop-in for a portfolio, and the easy way to do that is through the iPath S&P MLP ETN (IMLP).
The Atlantic Trust Select MLP Index
The previous indices on this list are really the bread-n-butter tracking vehicles. However, like most sectors, there are plenty of alternatives in the MLP space as well. From high-yield to small-caps, investors have a ton of extra choices in the MLP space, and the Atlantic Trust Select MLP Index could be an interesting one.
The index—which was launched by private wealth management firm Atlantic Trust—seeks to capitalize on the “higher end of the MLP space.” It does this by screening for MLPs with the highest credit rating qualities. The index screens MLPs the in energy sector or gas utilities Industries for long-term credit rating, cash flows, market capitalization and trading volumes [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
While that may sound similar to the other indexes on this list, the real differentiation comes from the fact the Atlantic Trust Select MLP Index can also include the general partners or GPs of the MLPs. These firms—who are really running the partnerships—feature many benefits in their own right and have become equally as important to own in recent years as the MLPs themselves. The index will cap the maximum weight for LP interests at 8% and GP interests at 4%.
Given the one-two punch, the Atlantic Trust Select MLP Index could be an interesting addition to an investor’s portfolio. Currently, the Barclays ETN+ Select MLP (ATMP) is the only fund that tracks it.
The Bottom Line
Just like the number of individual MLPs, the number of indexes tracking them has grown exponentially. However, picking a favorite can be seen as a daunting task. The previous five indexes represent the cream of the crop and hold the most investor money. When looking to add this asset class to a portfolio, investors may want to guide their portfolios in the direction of the funds above.
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