First Inverse MLP Product Hits The Market: MLPS

The UBS E-TRACS 1x Monthly Short Alerian MLP Infrastructure Total Return Index ETN (MLPS) began trading September 29, 2010.  Exchange-traded products (ETFs and ETNs) focusing on Master Limited Partnerships (MLPs) have been coming to market at a rapid pace, and investors now have seven to choose from.  MLPS is the first to offer inverse exposure to the MLP asset class.

MLPS (overview page) is designed to provide a short exposure to the MLP infrastructure market by tracking the inverse performance of the Alerian MLP Infrastructure Total Return Index, less investor fees (expense ratio) of 0.85% per year.  The 100% inverse exposure will be reset monthly on the first trading day of the month.  These securities are not intended to be used in a long-term buy & hold strategy.  Performance for periods greater than one month is likely to be either greater than or less than the inverse performance of the underlying index as a result of compounding.

Exchange-traded notes (ETNs) are unsecured debt obligations and are subject to credit risk from the issuer.  UBS is the issuer for MLPS and additional information can be found in the MLPS fact sheet (pdf) and the prospectus.  The ETN is linked to the inverse returns of a total return index and will not pay any coupons (dividends).  Yearly tax reporting will be on 1099 forms, not K-1s.

The recent surge in the popularity of MLP investing will likely create an overbought situation for the group sometime in the future.  MLPS should make a great tool to profit from the inevitable decline.  The Alerian MLP Infrastructure Total Return Index is comprised of 25 energy infrastructure MLPs that generally earn the majority of their cash flow from the transportation and storage of energy commodities.

If you are considering an MLP ETF or ETN, here is a quick summary of the seven products currently listed for trading:

1. JPMorgan Alerian MLP ETN (AMJ) launched more than a year ago and is the largest and most liquid.  It covers the entire MLP sector using a cap-weighted methodology of the 50 largest MLPs.
2. UBS E-TRACS Alerian MLP Infrastructure Index (MLPI), launched in April 2010, covers the “infrastructure component” of the sector where each of its constituents generate at least 50% of their earnings from assets that are not directly exposed to changes in commodity prices.  It employs a multi-tier capped weighting process with the largest of the 25 holdings capped at 9.5%, followed by additional caps at 7.0% and 4.7%.
3. Credit Suisse Cushing 30 MLP Index ETN (MLPN), launched in April 2010, tracks an equal-weighted index comprised of 30 publicly traded stocks in the North American energy infrastructure niche, primarily midstream energy assets.
4. UBS E-TRACS 2x Monthly Alerian MLP Infrastructure Index ETN (MLPL) was listed for trading on July 7, 2010.  It tracks the same index as MLPI but with 2x leverage juicing its yield to 12.9%.
5. UBS E-TRACS Alerian Natural Gas MLP Index ETN (MLPG) was listed on July 14, 2010.  It tracks an equally weighted index of 15 MLPs in the natural gas infrastructure sub-segment.
6. Alerian MLP ETF (AMLP) was listed for trading on August 25, 2010 and is the first product to be an ETF instead of ETN.  It tracks the same index as MLPI, MLPL, and MLPS but it employs a daily leverage of about 62.5%.  Because of its ETF structure, the fund is liable for corporate income taxes, so the fund withholds 37.5% of the daily move from shareholders for the purposes of paying those taxes.  Additionally, taxable shareholders should note that distributions are expected to be tax-deferred return of capital, not tax-free dividends, and may potentially increase your tax liability upon sale.  Consult your tax advisor.
7. UBS E-TRACS 1x Monthly Short Alerian MLP Infrastructure Total Return Index ETN (MLPS) (the subject of this article) was listed on September 29, 2010 and is the first to provide inverse exposure (-100% monthly) to MLP performance.

Disclosure covering writer, editor, and publisher:  Long AMJ.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.