When it comes to investing, most ETFs go the whole index route. They invest in everything that constitutes that index. This approach is usually market capitalization weighted. This creates the advantage of weighing heavily towards large capitalization companies but also holding the small and upcoming ones. With great passive mirroring usually comes great mediocrity. The Global X MLP ETF (NYSEARCA:MLPA) has tried a different take on this. Rather than going the whole index route, it holds a relatively small basket of the largest and most liquid MLPs. How does this work out for investors? We find out below.
MLPA was founded in 2012, a time when MLPs were actually quite in favor. The fund held 20 of the biggest names in the space and sold investors the concept of ease of investment alongside high yields. Much has happened since then in the space, and while 20 holdings might have seemed like a narrow field back then, today things are rather different. Many companies have merged with others. Some have gone the C-Corporation route. So while 20 was being rather choosy at the beginning, today it is picking up the entire sector.
Source: MLPA Fund
In fact, the top 10 account for about 70% of the fund’s assets. The fund does provide a sector breakdown, although this might have taken some creative thinking as most of these companies engage in more than one of the three different aspects in the midstream trade.
Source: MLPA Fund
Investors considering this ETF would want to benchmark against Alerian MLP ETF (NYSEARCA:AMLP). Our comment about the industry’s sad and contracting state can be directly visualized by the fact that as of today AMLP holds 19 different companies.
Source: AMLP Fund
So while AMLP began by investing in over 30 companies, it has now shrunk down to 19. There is a massive overlap between the two, although MLPA has different weights for all holdings.
MLPA shines in this regard with a low expense ratio of 0.46%. This beats a wide variety of specialized ETFs. AMLP on the other hand charges almost twice as much at 0.87% annually. The difference comes straight from the management fees charged by AMLP, as their trading expenses are similar.
MLPA has a high yield currently but we would not bank on that being sustained.
Over time the fund’s underlying holdings have cut again and MLPA has had to move in lockstep. In fact we are certain that the distribution will be cut again and rather quickly as Energy Transfer LP and NGL Energy Partners LP (NYSE:NGL) “surprised” everyone with distribution cuts. When analyzing the fund’s history, do keep in mind that there was a gigantic reverse split recently and older announcements need to be adjusted for that.
Source: Global Newswire
Looking next at the performance between these two industry stalwarts, we can see that neither induce a smile on their shareholders’ faces. AMLP outperformed by about 1.5% over the last eight years and that in a way is impressive as it had to overcome about 0.4% annually of fee drag.
This might have come from which losing investment AMLP held less of over time versus any tactical missteps by MLPA. Since their holdings have converged even more today, it is hard to recommend one over the other just based on past performance.
Analyzing a fund like MLPA in a vacuum without giving an opinion on where we think the industry is going is pointless. Hence, to give this article meaning, we are going to the macro outlook next.
MLPs built and built and spent capital on growth for the last decade. It was almost a foregone conclusion that if something could be built, it would be built, without ever asking if it would have value a decade down the line. It was this behavior that has led to the current state of the industry where takeaway capacity in midstream is exceeding input capacity. This will only get worse at current price points for oil and to some extent natural gas. Pricing power will continue to look shoddy and stranded assets are highly likely. While we believe in the future of oil and gas, our take remains that the midstream assets are least likely to participate in this. Upstream is where you want to be. The bottom line of us is that there is no scenario where upstream does badly and midstream does well. On the other hand, we can envision many situations where upstream does well and midstream still struggles.
MLPA is a standard ETF and provides you with exposure to the midstream assets. As one famous ex-president would have said “If you like your midstream exposure, you can keep your midstream exposure.” There is nothing wrong with MLPA in this regard, and there is nothing wrong with AMLP either. But neither of them is for us. We do like some midstream plays selectively, and in most cases, they are higher up the equity chain. If you absolutely must own a fund in this space, aim for a good closed-end fund, trading at a sizeable discount. That way, if you are right, you can get some tailwind of discount compression.
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