Morgan Stanley Gets in the ETN Business With New Offering Covering MLPs

Morgan Stanley (MS) last week issued its first ETN (exchange-traded note) products listed for U.S. investors. The Morgan Stanley Cushing MLP High Income ETN (MLPY) began trading 3/17/2011 and will track a customized index of Master Limited Partnerships (MLPs).

The underlying criteria-weighted index tracks the performance of 30 MLPs that hold energy infrastructure and related assets in North America. The index is constructed with a multi-tier equal weighting process based on yield, capitalization, and other factors:

• Tier I consists of the 10 MLPs with the highest current indicative yield, equally weighted at 5%, from those with a capitalization greater than $1 billion.
• Tier II consists of the 10 MLPs with the highest current indicative yield, equally weighted at 3.5%, from those with a capitalization greater than $700 million and not included in Tier I.
• Tier III consists of the 10 MLPs with the highest current indicative yield, equally weighted at 1.5%, from those with a capitalization greater than $500 million and not included in Tier I or Tier II.

The current ten Tier I holdings (5.0% weighting) are Boardwalk Pipeline Partners LP (BWP), BreitBurn Energy Partners LP (BBEP), Copano Energy LLC (CPNO), Enbridge Energy Partners LP (EEP), Encore Energy Partners LP (ENP), Energy Transfer Partners LP (ETP), Linn Energy LLC (LINE), Inergy LP (NRGY), Regency Energy Partners LP (RGNC), and Teekay Offshore Partners LP (TOO). No information on the Tier II and Tier III holdings could be found on the Morgan Stanley website or from Swank Capital Cushing Indices, the index provider.

MLPY says it expects to make quarterly payments with initial annual yield estimated at 5.78%, based on an underlying index yield of 6.63% and subtracting out the 0.85% tracking fee.

MLPY is an exchange-traded note, which means it holds no assets and is an unsecured debt obligation of Morgan Stanley. Like other MLP products, MLPY will provide annual tax reporting on the preferred Form 1099, instead of the more complicated multi-state K-1 forms.

Nine different ETPs now cover the MLP asset class. While most are relatively similar, there’s a leveraged one, an inverse one, and one structured as an ETF that has to pay corporate income taxes.

Only one other ETN uses a Cushing Index, which will likely cause investors to draw comparisons. The Credit Suisse Cushing 30 MLP Index ETN (MLPN), launched in April 2010, tracks an equal-weighted index comprised of 30 publicly traded stocks in the North American energy infrastructure niche, primarily midstream energy assets.

Unfortunately, the Swank Capital Cushing Indices website does little to clarify the difference between the two indices. In fact, Swank seems to discourage comparisons by showing "historical total return" for one index and "historical yield" for the other.

Morgan Stanley has a new ETN webpage, so I suspect we will see additional offerings from them. Additional information on MLPY is available on the overview page, in the fact sheet (pdf), and in the prospectus (pdf).

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Disclosure: Covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.