ETF of the Week: Alerian Energy Infrastructure ETF

It’s a particularly timely ETF as winter cold fronts continue to drive up energy prices in the U.S. Midstream companies are responsible for the transport of fuel sources, as well as storage, delivery, and other related services. Because of the contracts that midstream companies have, they are also a source of predictable income based on the fees they collect.

“If you’re looking for areas to protect yourself around inflation, if you feel that energy prices are going to continue to rise, if you’re looking for cash flow and regular income, this is something to definitely consider,” Lydon explains.

Lately, advisors are looking for income opportunities as fixed income continues to face challenges and there are rising concerns around the valuations of equities. Midstream companies can offer more stability because of the critical role that they play within the energy infrastructure.

Midstream companies have had yields above 6.5% lately, something attractive in markets where the AGG has underperformed in the last year and the 10-year Treasury has recently risen above 1.8%, Lydon says. Advisors have been searching for alternatives for the fixed income portion of their traditional 60/40 portfolios and are either converting parts to cash, investing in short-duration bonds, moving into equities, or pursuing alternative income strategies such as midstream investing.

Money is moving within markets at a rate that Lydon hasn’t seen since the financial crisis, and with inflationary concerns, midstream can be a safer bet as midstream contracts have inflation clauses built into them. The energy sector has taken a hit from COVID, Lydon cautions, but it seems to have mostly recovered and be on the uptick.

“Now with this new uptrend in place and concerns about rising interest rates and inflation, and seeing energy prices increase, it’s something to consider if you don’t have an allocation to this area. It’s noncorrelated to equities, it’s noncorrelated to fixed income, and I think diversification is going to be the word in 2022,” Lydon says.

For more news, information, and strategy, visit the Energy Infrastructure Channel.