Summary
- MLP/midstream investment options have evolved as the midstream space has shifted more toward corporations and the number of MLPs has declined.
- The number of midstream RIC ETFs has increased, while the selection of closed-end funds and exchange traded notes has gradually narrowed.
- Investors still have a wide range of active and passive MLP products to meet their investment objectives.
Over 130 MLP/midstream investment products have been launched since 2004 across closed-end funds (CEFs), ETFs, exchange traded notes (ETNs), and mutual funds. Investment products provide an important solution in the midstream/MLP space — namely, allowing investors to get MLP exposure with a 1099, instead of a Schedule K-1. While many investment vehicles have been launched, only a portion of those products are still available today. This note looks at the MLP product landscape and some of the notable changes in recent years, which have coincided with changes in the North American midstream universe.
ETFs: Several More RICs Than C-Corp ETFs
In the MLP space, there are two types of funds — those that predominantly own MLPs and are taxed as C-Corps, and those that are structured as regulated investment companies (RICs). Typically, an MLP-focused ETF taxed as a corporation is for investors looking to maximize after-tax yield, while an RIC is for investors seeking total return (read more).
There are only three MLP ETFs taxed as corporations — two passive and one active. Launched in 2010, the Alerian MLP ETF (AMLP) was the first MLP ETF and remains the largest energy infrastructure ETF.
RICs can only own up to 25% of MLPs, and the other 75% of the portfolio is typically allocated to U.S. and/or Canadian midstream corporations, utilities, or other energy companies. There are around a dozen midstream-focused RIC ETFs, with a mix of active and passive approaches. Some of the newer entrants into this space also deploy options strategies.
ETNs: Menu Narrows But Still Offers Plenty of Variety
ETNs are unsecured debt obligations of an issuer that agrees to pay the return on an index. The first MLP ETN was launched by Bear Stearns in 2007 based on an Alerian index. After JPMorgan acquired Bear Stearns, it launched its own version of the ETN in 2009 – the JPMorgan Alerian MLP Index ETN (AMJ). Over two dozen MLP ETNs were launched by various banks between 2010 and 2020, including some levered notes. However, many of those have been redeemed over time. At least six MLP ETNs were liquidated between 2020 and 2023.
AMJ was the largest MLP ETN, and it just matured on May 24, 2024. However, JPMorgan Chase launched a successor ETN earlier this year, AMJB, which is also based on the Alerian MLP Index (AMZ) and will mature in 2044. With significant assets moving from AMJ to AMJB, AMJB is now the largest MLP ETN. We estimate there are eight actively traded midstream ETNs in total issued by JP Morgan, UBS, and Barclays, with all but one based on an Alerian index. Four are based on midstream indexes that include corporations. Only one is a levered ETN. ETNs provide little to no tracking error and are typically best-suited for investing in tax-advantaged accounts (read more).
Closed-End Funds: First to the Party But Numbers Dwindling
Closed-end funds were the first pooled investment products to collect K-1s and provide a Form 1099 to investors, beginning in 2004. Several MLP-focused CEFs were launched between 2004 and 2014, as well as a handful of RIC CEFs. CEFs can trade at a discount or premium to their net asset value, and their liquidity can be constrained. Closed-end funds often use leverage.
Many of the MLP-focused CEFs that were taxed as corporations have merged with other funds, converted to RICs, or liquidated. Recently, First Trust merged four CEFs into a new, actively managed ETF (read more). Earlier this month, shareholders approved the merger of two CEFs (CEM and CTR) into the ClearBridge Energy Midstream Opportunity Fund (EMO). Following that merger, we believe there will be just three MLP-focused CEFs taxed as corporations that are still actively traded. There are a few more RIC-compliant midstream CEFs, with most issued by Tortoise. Tortoise launched the first MLP CEF (TYG) in 2004, though TYG is now structured as a RIC.
Mutual Funds: Active Managers Look Beyond MLPs
There are a number of MLP or midstream-focused mutual funds structured as corporations or RICs. Like ETFs and CEFs, any mutual fund that owns more than 25% MLPs will be taxed as a corporation. Mutual funds tend to have higher fees than their ETF counterparts given their active management. Mutual funds taxed as corporations seem to commonly own midstream C-Corps, whereas the two passive ETFs taxed as corporations have a narrower MLP-focused mandate based on their underlying indexes.
Consolidation has resulted in fewer energy infrastructure MLPs, so mutual funds able to invest in corporations have a wider universe and potentially more ways to generate alpha from stock selection. This was perhaps easier in 2020 and 2021 when midstream corporations outperformed MLPs (read more). With MLPs outperforming C-Corps in 2022 and 2023, investments in C-Corps could cause mutual funds to lag if benchmarked against an MLP index. Investors paying higher fees for active management will hope to see outperformance relative to a benchmark. So performance discrepancies between MLPs and C-Corps add important context to fund performance.
Investing Landscape Evolves With the Midstream Space
The MLP product landscape has shifted over time in parallel with the evolution of the midstream space. Consolidation has resulted in fewer publicly traded midstream MLPs. And midstream corporations have become a larger part of the universe by market capitalization. With that backdrop, it is not surprising that more RIC ETFs have come to market. By the same token, historically, MLP-focused investments like CEFs and ETNs have seen their numbers shrink over time. That said, there are a handful of CEFs and ETNs that provide exposure to both MLPs and corporations. The two passive ETFs taxed as corporations maintain focused MLP exposure. And mutual funds taxed as corporations generally have a broader mandate that includes both MLPs and corporations.
Bottom Line:
MLP/midstream investment vehicles have evolved with changes in the midstream universe. But investors still have an expansive menu of active and passive funds and products to meet their investment objectives.
AMZ is the underlying index for the JPMCFC Alerian MLP Index ETN (AMJB) and the ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN (MLPR).
Related Research:
Led by MLPs, Midstream is Energy Bright Spot in 2023
MLP ETFs and Finding the Right Fit for Your Portfolio
Are CEF to ETF Conversions the Latest Trend?
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMJB, MLPR, and AMLP, for which it receives an index licensing fee. However, AMJB, MLPR, and AMLP are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMJB, MLPR, and AMLP.
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