iPath, the exchange-traded note issuer arm of Barclays Bank PLC, has recently announced the launch of iPath S&P MLP ETN (IMLP), an exchange-traded note (ETN) that aims to provide investors exposure to the Standard & Poor MLP Index.
IMLP pays a variable coupon quarterly and is designed to provide access to the energy infrastructure-focused Master Limited Partnership (MLP) segment, a small but vibrant pocket populated by investors who wish to avoid the low yielding bond fund sector.
Energy infrastructure tracking MLPs are usually operators and owners of assets that are used for storage and supply of energy products such as oil and gas pipelines and storage facilities. The S&P MLP index, the fund’s underlying index, follows firms that trade publically as LLPs with the legal structure and tax benefits similar to MLPs or as pure MLPs on major US exchanges such as the NYSE or the NASDAQ, and are listed either in the Gas Utilities Industry or the GICS Energy Sector.
MLPs display three distinct characteristics that make them attractive to certain investors:
First, they have relatively low correlation with the performance of the equity markets. The S&P MLP Index has exhibited a correlation of 0.56 with the S&P 500 on an average over the past five years.
Second, MLP products can be effective hedge against inflation since the energy-asset owners and operators typically execute toll-based revenue models with inflation hedges built into the contracts.
Third, they have an efficient tax structure that allows them exemption from corporate taxes since any income must be passed on to shareholders through distributions, thus boosting yields. The quarterly coupon payment is linked to cash distributions made by the underlying index constituents. The S&P MLP Index currently yields 5.90 percent annually.
The index currently constitutes 56 members with an adjusted market capitalization of about $10.5 billion. No single security can account for more than 15 percent of the benchmark at the annual re-balancing date, and for all constituents that contribute more than 4.5 percent individually, the collective weight can not exceed more than 45 percent of the index.
The largest constituents of the index are Enterprise Product Partners, Kinder Morgan Energy Partners, Plains All American and Magellan Midstream.
You should, however, bear in mind that ETNs are essentially debt instruments and hence bear the credit risk of the issuer; Barclays Bank PLC in this case.
IMLP has an annual expense ratio of 0.8 percent.
With currently an average daily volume of only 2,500 shares, it will take a few months for this ETF to establish itself, so I will review its progress in the future.