The crowd has discovered energy MLPs

• abnormalreturns
• June 29th, 2010

Every so often you see a handful of news items that adds up to an interesting anecdote.  Whether it becomes something bigger down the road remains to be seen.  In the past few weeks there has been a handful of fund launches in the energy master limited partnership (or MLP) space.

• The Clearbridge Energy MLP Fund (CEM), a closed-end fund, came to market and raised over $1.2 billion in assets.  (Marketwatch, WSJ)
• The Alerian MLP ETF filed to launch.  Note that this is the first MLP ETF. (IndexUniverse)
• The Market Vectors MLP ETF soon followed.  (IndexUniverse)
• SteelPath Fund Advisors launched a family of open-end mutual funds providing access to MLPs.
• There are also a handful of MLP ETNs already trading:  the JP Morgan Alerian MLP Index ETN (AMJ), the UBS E-Tracs Alerian MLP Infrastructure ETN (MLPI) and the Credit Suisse Cushing 30 MLP Index ETN (MLPN).

This boom shouldn’t be all surprising. The chart below compares the performance of the JP Morgan Alerian MLP Index ETN against the S&P 500, the S&P Energy SPDR and the iShares Dow Jones Select Dividend ETF.  As you can see the MLPs have handily outperformed over this time period.

Source:  StockCharts.com

The case for energy MLPs is pretty simple:  yield.  MLPs have it in abundance, especially compared to traditional areas of fixed income.  That yield does come with some tax complications, so the form in which one might hold MLPs (direct, ETN, ETF, CEF) does matter.

So what’s the bottom line?  The point is not that MLPs are necessarily poised for a fall.  (Although that is always a possibility.)  This cluster of activity does indicate that interest in MLPs is pretty high.  You don’t launch a $1+ billion closed-end fund without a healthy bit of froth.  What it means is that you should be more discerning in your approach to MLPs now that they have been discovered by the crowd.

Update:  There is an addition contender in the MLP ETN space.  UBS has introduced a leveraged MLP ETN, the E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL).  Just another sign that the fast money crowd has discovered MLPs.

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Tickers: AMJ, CEM, MLPI, MLPL, MLPN

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