Our current outlook on the midstream sector is no secret. We think this sector is going to face a two-pronged headwind. Due to the large capacity, it will face pricing pressures from distressed customers who can take their business elsewhere for a much lower cost. Secondly, there is a question on whether their customer, the downstream shale patch, even has enough remaining reserves to hit the previous highs. There may be too many midstream companies vying for the reducing pie.

We recently covered the Global X MLP ETF (MLPA), an ETF that invests in midstream Master Limited Partnerships or MLPs. Today, we will talk about another Global X Midstream ETF from the same umbrella of funds. We will be going over the Global X MLP & Energy Infrastructure ETF (MLPX). While MLPA only held MLPs, this one, as the name suggests, holds MLPs, along with other entities such as general partners of MLPs and energy infrastructure companies.

To begin with, we compare the pure MLP play with MLPX, and we see that MLPX has performed better.

(Source: ETF.com)

This outperformance is rather substantial, and we were curious as to what was driving it. To this, we studied the fund’s prospectus and its recent holdings.

Holdings

The top ten holdings include familiar corporate names. We see a few MLPS in this list. Overall, the look is quite different than traditional MLP funds. According to the mandate of MLPX, the fund cannot hold more than 24% in MLP weight measured by its market capitalization. This is highly unusual in a fund that actually has MLP in its name. But we checked the documents and this actually falls within its mandate. The key reason it cites is tax efficiency.

Unlike traditional MLP funds, MLPX avoids fund level taxes by limiting direct MLP exposure and investing in similar entities, such as the General Partners of MLPs and other energy infrastructure corporations.

(Source: MLPX Prospectus)

It is true that taxes can be a drag on MLP funds. But this has not been an issue over the last few years, as MLPs have been in bear markets overall. Under those conditions, there is no disadvantage to owning MLP ETFs and CEFs. But in a bull market, taxes can come into play, and ETFs and CEFs can lag because of this limitation. MLPX is trying to dodge this bullet by focusing on related non-MLP holdings.

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Looking at the fund’s holdings, we can see that it is sticking to this task.

(Source: MLPX)

The fund is extremely concentrated though. The top 10 make up over 66% of its total assets. Canadian firms like Enbridge Inc. (ENB), TC Energy Corporation (TRP) and Pembina Pipeline Corporation (PBA) make up huge portions of this fund. MLPX had 26 holdings as of the most recent update at the time of writing this piece. While that is more concentrated than most funds, remember that most investors land up holding a very small percentage of their overall dollars here. Hence, the concentration is not a big bother.

Asset Mix

The fund is overweight the Natural Gas Storage and Transportation business as per the most recent industry breakdown on the fund website.

(Source: MLPX)

Some of this is quite subjective, as many companies conduct different businesses within the midstream space, and most are involved with all three areas. There is also overlap in some assets, and breaking this down does not really help investors make an investment decision.

Performance

MLPX has underperformed its benchmark, the Solactive MLP & Energy Infrastructure Index. With an expense ratio of 0.45%, the underperformance is more or less due to the fact that index funds do not have any expenses, whereas the ETFs tracking them do.

(Source: MLPX)

But if you step outside its own index and compare this fund to MLPA or even the industry standard ALPS Alerian MLP ETF (AMLP), we get a totally different picture. MLPX has done an outstanding job here, and while a total return of negative 17.33% is not enthralling, it is extremely impressive considering what has happened to the sector and sector ETFs.

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ChartData by YCharts

This has come from focusing on corporations (versus MLPs) and not trying to chase yield.

Distributions

MLPX provides a not-too-shabby yield of around 8.7% currently.

This is actually around what the fund receives on its investments after expenses. MLPX has a good deal invested in companies that are steadily growing their payouts, and in general, the distributions appear safe at this level. That said, the sector is still in turmoil, and Global X has not hesitated to cut the distribution on its other funds when it has needed to.

Conclusion

With our current outlook on the midstream sector, it is hard to get excited about any ETF in this sector. However, MLPX has done an outstanding job so far and saved investors a lot of grief. The outperformance comes from holding more stable and less leveraged corporations versus the actual MLPs. It also comes from a large Canadian focus, where overbuilding of assets is unheard of and dreams of growth are more moderate. It has beaten AMLP rather handily and has low expenses and no leverage. We are not bullish overall on midstreams, but if we had to buy an ETF in this sector, it would be this one.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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