Investors well-versed in the world of master-limited partnerships (MLPs) probably know about general partners, a sub-set of the MLP space with its own potent income-generating potential. While there is no shortage of exchange traded funds income investors can tap for MLP exposure, not all of those funds also hold general partners.
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The Advantage Of General Partners
The Global X MLP & Energy Infrastructure ETF (MLPX) is one of the MLP ETFs that features general partner exposure. In an environment where MLPs are in favor, which was seen prior to oil's precipitous decline starting in 2014, general partners can shine. General partners have several advantages, including less tax complexity than MLPs and more dividend flexibility.
After being bludgeoned, some MLPs got so inexpensive that some big-name professional investors just could not resist nibbling at the asset class.
While investors clearly like MLP ETFs, many are not aware until it is too late of a nasty surprise with some MLP funds. That is these ETFs are structured as C-corporations, meaning issuers can ding investors with high fees well in excess of the ETF's stated expense ratio.
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A General Partner is compensated for its management efforts through incentive distribution rights (IDRs), which are a form of carried interest. The structure of IDRs incentivizes a GP to increase the MLPs distributions to its common unit holders. As the General Partner raises the nominal amount of distributions made by the MLP to predetermined thresholds, the GP receives an increasing percentage of the distribution, according to recent Global X research.
Digging Deeper Into MLPX
MLPX, which is almost three years old and has $86 million in assets under management, can allocate up to 25 percent of its lineup to traditional MLPs and the rest to general partners and energy infrastructure firms.
Enbridge Inc (USA) (ENB), Kinder Morgan Inc (KMI) and Williams Companies Inc (WMB) combine for about 24 percent of MLPX's weight. MLPX has a standard deviation of 20.4 percent, which is decent among funds in this asset class, but significantly higher than a standard U.S. equity index.
Despite having lower distributions yields than LPs, the General Partners of MLPs have exhibited in certain environments higher distribution growth rates than their LP counterparts due to the compensation structure established by IDRs. These higher distribution growth rates can be a major driver for the total return outperformance GPs might experience in bull markets as distributions grow.
There are additional factors that make GPs appealing including their M&A activity and significant institutional investment. While some GPs have recently cut their distributions, their greater cash flow flexibility could make GPs asset buyers in a low valuation market, potentially positioning them for a strong rebound when energy prices climb, added Global X.
Disclosure: Todd Shriber owns shares of Kinder Morgan.
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