Many investors are considering an allocation to an MLP ETF as the segment continues to offer generous income and compelling returns.
The two largest MLP ETFs have important differences that investors should consider before investing in either fund. The funds worth comparison include the $9.0 billion Alerian MLP ETF (AMLP ) and the $1.6 billion Global X MLP ETF (MLPA ).
At a glance, AMLP and MLPA appear to offer very similar exposure to MLPs. In fact, the two funds’ have an 88% portfolio overlap by weight, according to ETF Research Center. However, there are notable differences in the funds’ performance, distributions, and cost of ownership that are important to consider.
Performance and Liquidity
AMLP is up 18.2% year to date through July 11 while MLPA is up 14.6%, each on a total return basis. Over a one-year period, AMLP has climbed 30.7% and MLPA has climbed 21.6%.
Furthermore, AMLP maintains its lead over three years; AMLP and MLPA are up 69.2% and 59.6%, respectively, nonannualized.
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Additionally, investors may prefer the greater liquidity of AMLP. AMLP’s three-month average daily trading volume is over 1.2 million shares compared to MLPA’s three-month average volume of 154,741 shares.
Cost to Own an MLP ETF
AMLP charges 85 basis points, while MLPA charges just 45 basis points. A lower expense ratio can be a selling point, especially in the low-cost ETF realm.
However, investors who prioritize a lower fee may be giving up performance in this instance. Looking at the data above, AMLP has a track record of handily outperforming MLPA, even when considering its higher expense ratio.
Using MLP ETFs to Maximize Income
Income is a primary reason why many advisors add an MLP ETF to portfolios. The segment is known for offering more generous income and for being more defensive than other subsectors of energy.
MLPs offer compelling yields relative to other income-producing asset classes such as REITs or utilities. Furthermore, MLPs’ yields are not sensitive to interest rate movement. This means an MLP ETF has the potential to provide attractive income throughout various interest rate environments.
Looking at both funds, AMLP has an edge over MLPA in generating steady, growing distributions for investors.
For the distribution paid in May, AMLP increased its distribution by 6.8% from the previous quarter to $0.94. Meanwhile, MLPA grew its distribution by 3.4% to $0.90.
In 2023, AMLP’s distribution increased 14.0% compared to the year prior, while MLPA’s distribution was only up 9.9%.
In 2022, AMLP’s distribution grew by 4.6% compared to 2021, while MLPA’s distribution declined.
AMLP’s indicated yield is 7.8% and MLPA’s is 7.4% as of July 12, according to Bloomberg.
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