Monday, September 12, 2011

ETFs and MLPs, Handy for Do-It-Yourself Funds

Create Your Own MLP Fund For Higher Returns

Buying small positions in several high yielding MLPs can be more profitable than investing in an MLP ETF or ETN. After adjusting for management fees, the net return of ETF and ETNs is considerably lower than the highest yielding MLPs. This chart lists some of the most popular MLP ETFs and ETNs with their management fee subtracted from the yield:

MLP ETF/ETN Mgmt. Fee Yield Yield minus Fee
Alerian MLP ETF (AMLP) 0.85% 6.4% 5.55%
Tortoise Energy Capital ETF (TYY) 0.95% 6.5% 5.55%
Cushing 30 MLP Index ETN (MLPN) 0.85% 7% 6.15%
UBS E-TRACS Alerian MLP ETN (MLPI) 0.85% 5.3% 4.45%


In addition to lower yields, MLP ETFs do not appear to offer the same level of safety as other sector ETFs. Tortoise (TYY) declined 70% from its 2007 high during the 08-09 recession. Aside from Alerian, the volume is considerably lower for MLP ETFs than MLPs themselves. ETNs have their own set of risks due to their unique credit structure.

The primary safety feature of ETFs is diversity. Buying several small positions rather than one or two large positions, creates security and protection should something unexpected befall an individual MLP.

MLP ETFs have their purpose. Investors sitting on cash looking to generate income while waiting for better market conditions can park their money in these ETFs and collect 6% while they wait. They do not have to worry about K-1 forms and tax issues. Tax-deferred accounts cannot invest in MLPs without going through ETFs.

However, for income-oriented investors who are willing to hold MLPs for many years, creating a personalized fund of higher yielding MLPs may be more profitable. The following chart is an example:

MLP Yield
Energy Transfer Partners (ETP) 8.16%
Boardwalk Pipeline Partners (BWP) 8.32%
Kinder Morgan Energy Partners (KMP) 6.68%
Buckeye Partners (BPL) 6.5%
Plains All American Pipeline (PAA) 6.6%
Dorchester Minerals (DMLP) 7.13%
Average Yield 7.23%

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