Global X Funds, the New York-based issuer of exchange-traded funds has launched a master limited partnership or MLP product that seeks to take the tax-bite away generally associated with the C-corporation structure. The Global X MLP and Energy Infrastructure fund (MLPX) is designed as a Regulated Investment Company and is suitable for investors seeking to maximize capital appreciation and tax-deferred income.
This is the third MLP product from the fund group and scores over its April 2012 launch, the Global X MLP ETF (MLPA), since MLPA is structured as a C-Corp fund. Deferred tax liabilities impact the returns of C-Corp funds, resulting in much higher expenses for investors.
As the economy allegedly starts to look up, newer pipeline and midstream firms are likely to use this corporate structure to take advantage of the tax savings, given the rising demand for energy. Further benefit is expected to accrue from the industry’s toll-road business model as revenues are directly correlated with volume transported as opposed to commodity prices. Also, a report by the International Energy Agency forecasts the US will become the largest exporter of oil by 2017.
Midstream infrastructure MLPs own and operate assets used for transporting energy that include storage facilities, pipelines and other assets. Investors keen on seeking exposure in pure-play MLP products should note that MLPX could hold a variety of securities and may witness low liquidity and a wider bid-ask spread, at least during the initial days.
MLPX will track the Solactive MLP & Infrastructure Index, a benchmark that focuses on the performance of MLPs and energy infrastructure corporations, indicating the securities the fund can hold. For example, the fund needs to hold three-quarter or more of its holdings in energy and infrastructure companies, and can only hold up to a quarter of its assets in master limited partnerships.
The Solactive index consists of 35 securities that allows it to restrict exposure to MLPs in order to claim benefits from diversification rules. Individual MLP components are capped at 4.5 percent while energy infrastructure companies are weighted according to free float market capitalization.
All companies (non-MLPs) can receive up to 76 percent of weight on semi-annual index rebalancing days. In order to comply with index diversification rules, the benchmark must have 20 constituents with at least 13 of them registered as non MLPs.
MLPX has an annual expense ratio of 45 basis points and is significantly cheaper than the industry average which is almost double.
Disclosure: No holdings