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Summary I was invited to interview the portfolio management of the newest, actively managed, MLP-focused ETF, trading under the symbol AMZA. My concern with the new fund was the level of visibility provided about fund holdings, compared to a traditional ETF, which must match a specified index. AMZA provides a new, enhanced packaged fund product for investors who want MLP exposure. The active management strategies should provide meaningful and measurable improvements on traditional MLP ETFs. After my overview article on the new InfraCap MLP ETF (NYSEARCA: AMZA ) , I was offered the opportunity for a phone interview with portfolio manager Jay Hatfield. CFO Ed Ryan also joined in on the call. After watching the AMZA share price and the comments on my previous article, I wanted to ask some questions that had come up. Overall, I was impressed with the willingness of Jay and Ed to provide detailed answers to my questions. The following are my takeaways from our discussion and not direct quotes. On the choice of going with the actively managed ETF structure rather than the more common closed-end fund, Hatfield said that ETFs typically trade closer to the per share net asset value – NAV. This avoids the sometimes large share price/NAV spread, which can distort and disrupt the returns MLP closed-end fund investors actually earn. The AMZA NAV is published daily on the InfraCapMLP.com website. Over the short couple of weeks I have been watching the ETF, the share price and NAV have tracked closely together. I was very much interested to ask about whether the InfraCap fund would provide a higher level of visibility on the portfolio holdings, as opposed to the MLP closed-end funds, which can be quite opaque to what they actually own. The AMZA holdings are updated daily on the website (More on the holdings below). I asked about the wide bid/ask spreads – something like 30 cents at the time – that I experienced while trying to buy shares. Hatfield and Ryan acknowledged the situation and said they were taking steps to remedy it. When I checked the price over the last couple of days the spread was down to a more acceptable 6 cents. On the topic of holdings, as one of the new breed of actively managed ETFs, the holdings are based on the widely-followed Alerian MLP Infrastructure Index – AMZI, which is basically a market cap weighted index of the 25 largest midstream MLPs. To actively manage the ETF portfolio compared to the index, Hatfield will use several strategies: The weighting of MLP holdings will be changed based on a proprietary model that values MLPs based on commodity prices, cash flow forecasts, and relative valuations. For example, in the AMZI, the top MLP is Enterprise Product Partners (NYSE: EPD ) with a 10.25% weight. The AMZA top holding is Williams Partners LP (NYSE: WPZ ) at 14.97%. WPZ is now the combined operations of Williams Partners and Access Midstream Partners. AMZA will own the corresponding MLP general partner companies instead of, or in addition to, the MLPs tracked by the AMZI index. As a result, AMZA currently lists 36 stock market traded holdings, including GP companies like Plains GP Holdings (NYSE: PAGP ), the GP of Plains All American Pipelines LP (NYSE: PAA ) – which is the 2nd largest weighting in the fund – both Targa Resources Partners LP (NYSE: NGLS ) and Targa Resources Corp. (NYSE: TRGP ), and Kinder Morgan Inc. (NYSE: KMI ), which I view as an MLP company dressed up in a corporate business suit. The fund will sell call options against holdings to boost portfolio income. AMZA can employ up to 33.3% leverage. The current holdings list shows a negative cash balance (the leverage) of 22.73% of the portfolio holdings. I was also told that the $0.50 per share dividend paid on January 15 is the planned initial quarterly distribution rate. It is expected that the quarterly dividend will grow as the MLPs in the portfolio increase their distribution rates. Based on today’s closing share price of $21.77, AMZA has a current yield of 9.2%. As of December 31, the AMZI index had a reported yield of 6.1%. MLP Sector Investment Potential With a managed portfolio based on the AMZI index, investors will be able to see if the active management enhancements provide over time a meaningful return boost. The largest MLP-focused ETF, the ALPS Alerian MLP ETF (NYSEARCA: AMLP ) , tracks the AMZI. I will be comparing total returns starting on January 1, 2015 as the quarters go buy. AMZI provides an enhanced product to get MLP exposure in any investment account where K-1 reported income is not a good idea or just not wanted. If the active management strategies work, this ETF provides an alternative that offsets the negatives of both MLP ETFs and closed-end funds. Final note: If you are not familiar with the tax ramifications of funds that own MLP units, my article: Pros And Cons Of MLP Investing Through Closed-End Funds , is an oldie, but goodie that explains why an MLP ETF will significantly underperform the selected index. Disclosure: The author is long AMZA, PAGP, KMI. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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