Tag Archives: infrastructure

MLP ETFs Trading At A Huge Discount To NAV

The collapse in oil price has battered the energy sector as a whole, not sparing the master limited partnerships (MLPs) either. In fact, some MLP ETFs have fallen faster than the value of their underlying securities, creating a huge discount to their net asset value or NAV. This suggests an attractive entry point for long-term investors. This is especially true as the authorized participants (NYSE: AP ) of a discounted ETF steps in and redeems the underlying shares to remove the discount and restore the fund’s value back to its NAV. This process results in profits for the ETF holder when the market price rises relative to NAV (read: Is This the Worst Time For MLP ETF Investing? ). MLP: Is A Good Bet Right Now? Trading at deep discounts, the outlook for MLPs is bright amid the oil price rout. This is because most MLPs, which are engaged in the processing and transportation of energy commodities such as natural gas, crude oil, and refined products, are best positioned to withstand the decline in oil prices and be the major beneficiaries of an oil boom in the long term. Acting as toll-takers, these MLPs earn revenues on the volumes flowing through pipes and not on the commodity price. This nature of business will definitely give a boost to these stocks given that worldwide oil production is on the rise. Unlike exploration and production companies whose profits are directly correlated with commodity prices, MLPs have relatively consistent and predictable cash flows, making them safer and less risky than other plays in the broader energy space (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs ). Beyond the stability, yields are also pretty high thanks to some favorable tax rules – like we see in the REIT space – that push firms in the MLP space to pay out substantially all of their income to investors on a regular basis. Further, MLPs represent a great way of tapping the growing revolutionary developments in the field of unconventional energy. As a result, the steep decline in MLP stocks and ETFs provides an attractive investment opportunity to long-term investors, looking for growth and income. Below, we highlight some products that were trading at a steep discount to NAV as of January 15 (as per Fidelity ): UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) : Discount – 5.32% This product tracks the Alerian MLP Infrastructure Index, which comprises 25 mid-stream energy infrastructure MLPs. It has attracted $1.5 billion in AUM and trades in solid volume of 967,000 shares per day. The note charges 85 bps a year in fees and pays out a hefty yield of 8.04%. Credit Suisse Equal Weight MLP Index ETN (NYSEARCA: MLPN ) : Discount – 5.13% This ETN follows the 30 MLP Index, an equally weighted index that uses a formulaic, proprietary valuation methodology and comprises of 30 midstream MLPs. It has attracted $365.5 million in its assets base so far and sees good average daily volume of more than 325,000 shares. Expense ratio came in at 0.85%. The note pays out 7.53% in annual yield. UBS ETRACS Wells Fargo MLP Index ETN (NYSEARCA: MLPW ) : Discount – 4.69% This note tracks the Wells Fargo Master Limited Partnership Index, which provides exposure to all energy MLPs listed on the New York Stock Exchange or NASDAQ with market cap of at least $200 million. It failed to garner enough investor interest with AUM of just $7 million and sees paltry volume of about 13,000 shares. MLPW charges 85 bps in annual fees and expenses, and pays a solid yield of 9.82%. UBS ETRACS Alerian MLP Index ETN (NYSEARCA: AMU ) : Discount – 4.68% This product tracks the performance of the Alerian MLP Index, which provides exposure to 50 publicly traded energy MLPs. It has amassed $351.4 million in its asset base and trades in solid volume of nearly 468,000 shares. It charges 80 bps in annual fees and sports a dividend yield of 7.16%. RBC Yorkville MLP ETN (NYSEARCA: YGRO ) : Discount – 4.57% This note seeks to offer return of the Yorkville MLP Distribution Growth Leaders Liquid Index, which offers access to 25 MLPs exhibiting the highest distribution growth and superior liquidity profiles. It is also unpopular with AUM of $14.5 million and average daily volume of around 15,000 shares. Expense ratio came in at 0.90% and dividend yield stands at 8.54%. MLP ETNs vs MLP ETFs Unfortunately, there are some tax headaches when using the MLP structure, namely the possible need of a K-1 form at tax time. But this issue can be avoided by looking at MLPs that use an exchange-traded structure. This is because ETNs do not actually hold the securities of an underlying index. Instead, an ETN is an unsubordinated debt security that promises to pay out a return that is equal to an index. This is completely unlike an ETF that buys and sells the securities making up a particular benchmark. Due to this advantage, investors can buy MLP ETNs without the hassle of K-1 at tax time, making the above-products excellent choices for those seeking high yield without the taxation headache. Link to the original post on Zacks.com

BUI: Thrown Out With The Bathwater?

Summary BUI is a closed end fund seeking total appreciation through capital gains and income, investing in utility and global infrastructure equities. BUI currently yields over 8% as its discount to NAV is near record highs. BUI is an atypical closed end mutual fund that has been discarded with the rest of the CEFS over the last 12 months. The BlackRock Utility & Infrastructure (NYSE: BUI ) closed end fund is an investment that I could of only wish for… on paper. BUI is an investment in one of my favorite asset classes (utilities and infrastructure), utilizing one of my favorite investment strategies (covered call writing), in one of my favorite investment fund structures (closed end fund). Unfortunately, since inception, it has been at best a mediocre investment, in particular over the last 12 months. Is the fund a bad fund? Or has the baby been thrown out with the bathwater? The Basics The BlackRock Utility & Infrastructure fund is a closed end mutual fund seeking income and capital appreciation by investing in equities of companies engaged in the utilities and infrastructure business. It carries a 1.1% expense ratio and invests in a portfolio of utility stocks that can be found in many other utility ETFs and mutual funds. What separates this fund from the competitors is the portfolio managers’ strategy of using/writing call options on the individual stocks in order to generate current income. In theory, this should reduce the overall volatility of the portfolio while providing current income. Currently it is paying a distribution rate of 8.57%. In rising markets, these types of portfolios tend to underperform the market as the upside is capped with the written call options. Let’s see how the portfolio has done. The Numbers Closed End Funds are a unique type of an investment that require extra care and attention. Unlike a traditional open end mutual fund that trades once a day, a closed end mutual fund trades like a stock and can be bought and sold throughout the day. Unlike traditional mutual funds which are priced once a day at the net asset value, closed end mutual funds trade a market prices, that may or may not be indicative of the true net asset value. For these reasons closed end mutual funds are typically more volatile compared to traditional funds, not because of the underlying performance, but rather on the reactions or over reactions in the market price. To understand this, you must also keep in mind that closed end funds, unlike their open ended siblings raise money once, and then they list on a public exchange and trade like a stock. If you as the investor want to invest money in the mutual fund strategy, you are buying someone else’s shares. The fund managers have that finite portfolio to work with and that is it, no new shares are created when you decide to invest your money. What this ends up translating into is most closed end funds trading at discounts below the actual value of the funds. That is why it is important to note the difference between the Market Price and the underlying Net Asset Value (NAV). In times of trouble, the market price may be significantly below the actual NAV, and may be a good opportunity to invest and buy assets on sale. Over the last 12 months, Closed End Funds have been hit quite hard with investors pulling out money. Typically, a closed end fund investor is looking for current income. The recent concerns about the health of the high yield markets as well as the interest rate hikes has caused fear and money flowing out of such investments. Unfortunately most people look at closed end funds as an asset class rather than as an investment vehicle with underlying investments. Has BUI been lumped in with other closed end funds? Let’s take a look. (click to enlarge) (Source: CEF Connect) As you can see, YTD BUI’s market price is down approximately 11%, however the underlying NAV is down only 6.99%. In essence, the investors were willing to accept less for the fund that what it was actually worth. In 2012 and 2013 you have had the same results. 2012 in particular resulted in a situation where the funds market price was down 3.51% for the year, yet the underlying net asset value was up 8.69%. 2014 showed what happens when people are chasing yield and were willing to pay more for the fund than what it earned where the market up was up 24.95%, yet the underlying NAV was up only 16.05%. An astute closed end fund investor looks for these opportunities to buy or to cash in their gains. On an annualized basis we have the following. (click to enlarge) (Source: CEF Connect) Since the fund launched in 2011, the total return including distributions averaged out to 3.43%. The fund has lost value, however it distributed a significant amount of dividends and income from the options. On a net asset value basis, the fund has performed respectably, earning an annualized 7.69%. Included are the performance numbers for the Closed End Fund Utilities category. What you can see is as expected, the fund has underperformed versus the peers, however during bad times, such as over the last year, BUI which uses no leverage and only generated income by writing call options was able to lower the volatility versus the peers as seen in the net asset value. Furthermore, while investors did notice this, you can still make the argument that this fund was hurt by the overall “dirty water” being thrown out as the market price did not hold up as well as the net asset value. The one place where this is evident is in the visualized chart of historical discounts and premiums to net asset value. (click to enlarge) (Source: CEF Connect) As of the time of writing, the fund is trading a discount of 13.24% to underlying net asset value. This has been historically a bigger discount than average, last seen late 2013 during the Fed’s Taper Tantrum. Conclusions and Final Thoughts Going through this analysis, it becomes more and more clear that unfortunately for this fund, it is lumped in with other closed end funds. Unlike other funds that employ leverage and invest in risky assets, BlackRock’s Utility & Infrastructure fund uses no leverage, buys globally listed equities, generates income with covered call options and has reasonable management fees. Unfortunately even though the underlying portfolio is seemingly performing as intended, the majority of investors are willing to overlook that and treat this as any other closed end fund. For a long term income investor looking for utility and infrastructure exposure, this fund at the current prices may be worthy of a look, at the very least put on your watch list.