MLPs and C-Corps operating in the midstream segment can provide differing exposures to the space.
Midstream companies are either structured as MLPs or C-Corps. Because MLPs aren’t typically in broad market indexes, diversification benefits can be an appealing aspect of the MLP investment case.
In this context, an advisor asked VettaFi why an MLP would provide diversification benefits against a midstream C-Corp that may be included in broad equity indexes during a webcast on Oct. 8, prompting a deeper dive on this topic.
Although midstream C-Corps are eligible for inclusion in the S&P 500, just four names are currently in the broad index. These names are Williams, Targa, ONEOK, and Kinder Morgan, which tend to all be natural gas-focused and comprise just 0.4% of the SPDR S&P 500 ETF (SPY ) by weight.
See more: Investors in S&P 500 Are Missing Exposure to MLPs
MLPs and C-Corps don’t always perform the same, even if they’re focused on the same segment of the industry. This may be attractive from a diversification perspective.
“We have seen differences in performance at different times,” VettaFi’s Head of Energy Research Stacey Morris said. “We’ve seen MLPs sometimes be takeout targets in the past couple years, whereas maybe C-Corps have not been. I think there’s still an argument to be made that owning certain MLPs can certainly provide diversification from C-Corps that are focused on similar areas.”
Generally, there tend to be more natural gas pipelines in C-Corp structures, according to Morris.
The underlying index of the Alerian Energy Infrastructure ETF (ENFR ) is 25% MLPs and 75% U.S. and Canadian C-Corps. The fund has about a 40% exposure to companies primarily focused on long haul natural gas pipelines, according to Morris.
The Alerian MLP ETF (AMLP ), which has no C-Corps in its portfolio, has exposure to natural gas pipelines but also includes companies focused on compression and marketing and distribution. These are businesses that reside in MLPs and are not found in the midstream corporations included in the S&P 500.
Using MLPs to Diversify a Broad Market Exposure
Investors who own the S&P 500 are not getting exposure to an MLP that’s focused on marketing or an MLP that’s focused on pipeline transportation of petroleum, Morris said. Their midstream exposure is really negligible and more oriented to natural gas infrastructure.
This means adding targeted midstream exposure with AMLP or ENFR may enhance diversification. Additionally, it should not lead to redundancy with a broad equity allocation.
VettaFi LLC (“VettaFi”) is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing or trading of AMLP and ENFR.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
