Global X Funds, the New York-based provider of exchange-traded funds famous for niche strategies, has launched the Global X Junior MLP ETF (MLPJ), a fund that targets the small-cap segment of the Master Limited Partnership (MLP) segment.
MLPJ will track the Solactive Junior MLP Index, a benchmark that measures the performance of US-listed energy and resource MLPs involved in everything from mining to production of natural resources to storage, transportation and marketing with market capitalizations of between $200 million and $2.5 billion.
MLPs are typically operators and owners of energy and resource infrastructure assets such as refineries, storage tanks and oil and gas pipelines and were first created in the mid 80s.
A growing number of MLPs are also involved in the exploration and production of energy assets. The partnerships trade like equities and have been strong performers lately because of the strong tax-efficient cash distributions they offer. These entities don’t attract federal income tax liability since they derive most of their revenues from steady fees like real estate rents, transportation and storage charges, cash dividends and interest incomes, etc.
Because of steady dividend payments, MLPs have gained popularity due to weak yields from the traditional fixed-income markets. Most investors use them as safety investments, much like US Treasuries, but one that is known to deliver solid yields.
Furthermore, the US energy industry is expected to grow exponentially in the near future. According to a recent International Energy Association report, the US is all set to become the largest producer of oil in 2017 and a net exporter of natural gas by 2020. MLPs particularly stand to benefit from this energy revolution as demand for critical infrastructures like exportation, production, transportation and storage will grow exponentially.
While the MLP segment looks like well represented due to the presence of over a dozen ETF and ETNs; closer inspection reveals the small-cap segment has largely been overlooked by most issuers. MLPJ seeks to plug this gap and offers a fresh buying opportunity for retail investors.
Since the small-cap segment has most been excluded from the large-cap focused indices, valuations at current levels may look attractive for many firms. Also, as large operators seek to grow inorganically through M&As to fill the gaps in their value chain, many small players are likely to become attractive targets in future, thus adding to the upside potential.
MLPJ has an annual expense ratio of 0.75 percent and is brand new so there is no pricing and volume history available. Personally, I like see any new ETF to be on the market for at least 9 months so that I can better evaluate its long-term trend.