You probably have heard a little bit about this new Exchange Traded Note that tracks some sort of index of MLPs from Bear Stearns; the BearLinx Alerian MLP Select ETN (BSR).
I couldn't really find too much on it. Greg Newton has a little but the link to the prospectus from a news release didn't quite work, I saw nothing on the Bear Stearns website and I did not find anything on IndexUniverse either. I'm sure info is out there somewhere but I came up short.
It is safe to assume the backtest is good, but I have not seen it and do not know. But its an index of stocks (MLPs really) that presumably trade on the exchange so why does this need to be an instrument that relies of the health of the firm?
If we truly are in a liquidity bubble or a sub-prime bubble (maybe these would be one in the same?) the bottom will likely include a huge firm failing. This is not a comment about Bear Stearns in particular or any other firm but big bubbles bursting (I am not saying we are in a bubble but if you think we are) usually involve huge financial failures. If this is unfamiliar to you I would suggest finding a book on market history.
In Greg Newton's post on BSR he pokes some good fun at the whole story and he could be correct but all I can say is no thanks. ETNs, to my limited way of thinking strike me as being most useful for things that might be difficult to access in an ETF, which would not include a basket of MLPs, but maybe my thinking is wrong here.
Is the hook that the ETN eliminates the K-1 form? That is a guess do to my not finding any meaty info. If anyone has a link please leave it in the comments. Thank you.
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12 comments:
The link does work if you eliminate all of the spaces. My review is that the ETN seems OK,but the fees do not. the fee of 0.85% is a little much. If I am in
this for the dividends, and the average MLP dividend is 5.5%,my take would be reduced by the fee or 5.5-.85= 4.65%. That's less than a money market. Also since the fee is based on the NAV Bear also gets a "cut" on any appreciation of the index. That's a pretty hefty cut for just managing an index fund. For example DVY is at 0.4% and IVV
is at 0.09%.
It is lower than the CEF's like FMO at 1.69%, but those use leverage and that can add (or detract) from the yield and gains.
I guess I have to think on this one for a while.
Speaking of dividends....if I am holding SDS or any other ultrashort, do I end up paying the dividend. On a normal short I understand that the holder pays the dividend, but does that hold thru on these ETF's
Andy, no you don't pay any dividends on assets held short by the fund; you will receive dividends from SDS as you would from any other fund when there are capital gains or income to distribute.
the short and double short funds hold mostly treasuries so there is regular income that kicks out.
First, MLPs DON'T PAY DIVIDENDS, THEY PAY DISTRIBUTIONS. You can't compare this fund to DVY. This fund is essentially paying you tax deferred returns and taking the hit for you. If you owned the equity units, you would be taxed at ordinary income. The ETN allows people to hold MLP in mutual funds without running in the worry of UBTI. Look at the CEF press releases. They don't guarantee distributions will remain a return of capital. Also the index is steadier. You seem also to forget about the growth aspect of the MLP index. MLPs with increasing payouts increase faster in price. This is a valuable tool. My only qualm is that this fund is more correlated to the overall market than a FEN, FMO, or KYN. By the way FEN and FMO don't leverage to my knowledge. People get so caught up in the returns in a bull market, they forget how the piece interacts with the overall portfolio.
Roger, I commented on this one over at my blog, but I didn't think about the tax angle. Bear is saying that they think these should be taxed as bonds (interest payments), but it is possible that the IRS might look through the structure, and tax it as a bunch of MLP interests (they list that as a risk, because this is the first of its kind in the US).
Imagine how much fun multiple MLP interests would be... hopefully the ETN would aggregate them...
David
Alephblog.com
After looking further at this fund, it does use the term coupon. Total garbage. Basically they stripped out all the tax planning advantages of holding MLPs. Go with the CEFs if you want MLP exposure.
As to the IRS looking through the structure and seeing the MLP structure, why should the IRS care? They get their money now, instead of when the equity units are sold. Remember a portion from the distributions are tax-deferred. You are trading equity units, you own the business. It is different from stock. You don't realize all the tax on the distributions until you sell or unless your basis is reduced beyond zero. The MLP has a pretty strong lobby in the Congress.
That's interesting - so the CEF's work just like owning a basket of MLP's, with regards to only a portion of the distribution being taxable? That would seem to place BSR at a significant disadvantage.
It does not look to me like either of these vehicles are attractive alternatives to owing a few individual issues, though. The risk that the IRS would make changes to the MLP structure is significantly less than the risk to that of the ETN's (IMO).
OT question:
Anybody know what's up with Orkla SA today? http://tinyurl.com/2ra9vb
Is it possible to "fat finger" a limit buy so badly?
I own a very small position along with STO and NHY. Was quite a suprise when I looked at my end of day numbers considering the rest of the market.
(more) OT
Looks like ORKLY is back down to $20/share. Should've taken a screen shot of it. Someone had traded 138 shares at $72/share..
re: anonymous said...-
CEF's like FMO (or KYN, TYG) not only charge substantially higher fees, but with regards to the leverage they offer: you pay an additional mgmt fee on that too. E.G. KYN Prospectus lists 2.78% total annual expenses assuming leverage. Also, the comment that "Bear also gets a cut" of the upside is like saying State Street is "getting a cut" of the SPY upside or Powershares is getting a cut of QQQQ- it's just a mgmt fee, they don't get any 'upside'.
re: Mchoa - yes, the structure takes away benefits of tax deferral of outright ownership (if you want to file 10 state K-1s for a single partnership, let alone 40 K-1s if you hold a basket) (and when you sell MLP units, the recapture is at ordinary income rates, not cap gains) However, keep in mind, CEF ownership does the same- they are paying corporate taxes at the entity level for you, and you get no deferral.
re: "Why an ETN?"
Any registered invesment company (CEF or ETF or mutual fund) is prohibited from investing more than 25% of their assets in MLPs, or must pay entity level income taxes (which the MLP CEFs choose to do). As a result, you can't have an "MLP ETF" without having returns deviate from the index because of the taxes.
both bearstearns.com/bearlinx and alerian.com seem to work
Agreed,
But 100% of the payment from the closed end funds is return of capital (ROC). ROC adjusts your basis downwards and then depending on the holding period is long/short-term cap gains. Plus you don't run into the UBIT headache
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