HANetf’s North American energy infrastructure ETF will go from synthetic to physical replication after it can no longer secure “consistent swap counterparty support”.
The Alerian Midstream Energy Dividend UCITS ETF (PMLP), which seeks to replicate the performance of the Alerian Midstream Energy Dividend index, provides exposure to the liquid, dividend-paying portion of the North American infrastructure market through the use of swaps.
However, the fund is moving to a direct replication and will now track the Alerian Energy Corporation Dividend index.
This has several implications for the fund’s investable universe.
For one, the fund will no longer provide exposure to US Master Limited Partnerships (MLPs).
MLPs are partnerships – generally in natural resource sectors – which trade on a stock exchange but are not taxed at corporate level. The tax advantages inherent in the structure made MLPs popular with income investors, because the profits pass directly through to holders in the form of periodic distributions.
As a workaround, the fund’s new investable universe includes only companies which earn the majority of cashflows from midstream activities qualifying under the Energy MLP Classification Standards (EMCS), and the fund can hold ‘transferable securities’ other than shares of these companies – potentially even bonds.
Previously all companies categorised in the Oil & Gas Storage & Transportation Sector under the Global Industry Classification Standard (GICS) were eligible for the index, and, other than for MLPs, it offered exposure only to their stock.
Because of the new constraints, substantially less liquid securities can now be included in the index and the fund can now hold up to 20% of its assets in the securities of a single issuer, rising to 35% in ‘exceptional market conditions’.
This is likely to alter the return profile of the ETF, as well as increase the fund’s liquidity risk, concentration risk and tracking error, albeit with lower counterparty risk.
HANetf agreed a deal with Legal & General Investment Management (LGIM) last October to merge its US infrastructure ETF with a similar LGIM product, creating a $56.5m ETF.
