Cushing lists MLP ETFs — finally, some competition for Alerian?

by , 29th November 2018

Cushing Asset Management, a Texas-based asset manager best known in the ETF industry for the master limited partnership (“MLPs”) indexes it provides for ETNs, is jumping the fence and listing a series of ETFs that track its MLP index.

  • Cushing Energy & MLP ETF (XLEY)
  • Cushing Utility & MLP ETF (XLUY)
  • Cushing Transportation & MLP ETF (XLTY)
  • Cushing Energy Supply Chain & MLP ETF (XLSY)

All the ETFs are built more or less the same way. They start with the Cushing 30 MLP Index then smoosh it together with another index from either S&P or Dow Jones. Companies and MLPs in each product are chosen and weighted based on current yield. Weighting for each company is capped at 6% with a minimum constituent weight of 1%. The total weight of all MLP constituents is capped at 24% at rebalancing for tax reasons, discussed below. The Indexes are rebalanced quarterly.

XLEY will smash the Cushing 30 together with the S&P 500 Energy Index.

XLUY does much the same but with utilities companies from the S&P 500 Utility Index.

XLTY does the same again, but takes transport companies from the Dow Jones Transportation Average.

XLSY uses both the S&P 500 Energy Index and the S&P 500 Materials Index, but otherwise does the same thing.

Analysis – what are MLPs and why should I care?

Investors want income, which has been hard to find post-GFC. That search for income is taking them to places they never knew existed. One place is junk bonds, another place is MLPs. But what are they?

They’re companies, basically, that invest in oil, gas, energy and mineral production. But rather than structuring themselves as a corporation and pay corporate tax, they set themselves up as limited partnerships, like a law firm, so they can pay very little tax.

While zero tax may sound great for income, there is a downside: investors end up paying all the taxes themselves, even when the MLPs are held in a tax-exempt retirement account. So how do you buy them?

Source: Alerian, most MLPs are based in Texas.

Some MLPs have stocks that trade on exchanges like Kinder Morgan Energy Partners. But another way to gain access is using ETFs – including today’s listings.

But today’s listings from Cushing aren’t the first MLP ETFs. Alerian, another Texan ETF provider, has a very famous and special $8.6 billion MLP ETF called the Alerian MLP ETF (AMLP). It’s special because it’s not quite an ETF; rather it’s structured as a C Corporation, to get around US tax laws that stop regular ETFs owning 100% MLPs. (Cushing’s, by contrast, can only hold 24% MLPs and is structured as a more regular ETF).

What will be most interesting about today’s listings is seeing if Cushing can take market share from Alerian.

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