This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

New Small-Cap MLP Fund Offers Potential for Yield, Growth

NEW YORK TheStreet -- In the last couple of years there has been a flurry of exchange-traded products covering the master limited partnerships, or MLPs, with all of the funds so far having slightly different weightings of the same relatively large MLPs.

MLPs often provide infrastructure that allows oil and gas to get from one place (where it is taken out of the ground) to where it can be processed for consumption (like refineries) and collects what amounts to a toll.

The new Global X Junior MLP ETF (MLPJ) hopes to separate from the pack by offering small-cap MLP exposure. The Global X literature promoting the fund points to IEA estimates about increased oil and gas production in the U.S. benefitting MLPs in general, and increased production in the Bakken benefitting the small caps in particular, as the catalyst to buy MLPJ because exploration is more likely to involve smaller companies, even for transportation.

The methodology for the underlying index' construction calls for companies with market caps of $2.5 billion or less. The largest holdings in the fund are Suburban Propane Partners (SPH - Get Report)6.77%, Northern Tier Energy (NTI - Get Report)6.61% and Alliance Resource Partners (ARLP - Get Report). The fund has 25 holdings in all and charges a 0.75% expense ratio.

The fund will issue a 1099 tax form instead of a K-1 form for unrelated business taxable income or UBTI. This will come as a relief to MLPJ fund holders for not having to do extra work when doing their taxes.

The taxation downside to the fund was isolated by blogger Ron Rowland, who has gleaned from the prospectus that "the Fund's accrued deferred tax liability will be reflected each day in the Fund's net asset value per share" and that the tax will be calculated at a 35% rate, which Rowland says will cause a large tracking error between the fund and its underlying index.

There is an unquantifiable risk to investing in the space in the form of changes to the tax treatment of MLPs. Late last year, MLPs collectively sold off in the wake of "fiscal cliff" uncertainty with the fear being that the manner they are taxed could be changed.

Despite the complexity, MLPs receive favorable tax treatment and so any changes in their favorable taxation would likely hit the group hard. In 2006 it was announced the tax treatment of Canadian Royalty Trusts would become less favorable and the group got crushed. The CanRoys, as they are called, are a close enough cousin to MLPs to set a reasonable expectation should their tax status change as well.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
MLPJ $14.05 1.10%
ARLP $29.40 -4.20%
NTI $24.15 -1.10%
SPH $43.57 0.39%
AAPL $130.88 -1.30%

Markets

DOW 18,072.90 -159.12 -0.87%
S&P 500 2,110.51 -15.55 -0.73%
NASDAQ 5,039.9080 -49.4540 -0.97%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs