Investors might not know how little exposure they have to the energy sector — and MLPs, more specifically.
The energy sector is the fourth-lowest-weighted sector in the S&P 500, at 3.3% of the index by weight as of Sept. 25. The sector’s weight in the S&P 500 has declined as energy stocks have lagged other sectors.
The energy sector has been challenged as oil prices have weakened, making it the worst-performing sector in the S&P 500 year to date through Sept. 25. Oil is down almost 20% from a year ago, and JPMorgan recently lowered its fourth-quarter forecast for oil prices to $80 from $85 per barrel.
While energy has seen challenges, the midstream segment has been a bright spot. Midstream is less sensitive to moves in commodity prices given its fee-based business model, which supports stable cash flows. Additionally, the generous income offered by midstream investments can help offset potential volatility.
See more: Midstream Is Resilient as Oil Prices Fall
MLPs have performed well despite oil prices and weak energy sentiment; however, they are not included in the S&P 500. Therefore, investors getting energy exposure through a broad index likely have no exposure to this segment of the energy sector.
MLPs are listed as ineligible organizational structures, along with business development companies, ETFs, and closed-end funds, according to the S&P Dow Jones methodology document.
MLPs may be excluded because their tax-advantaged structure adds some complexity, according to Stacey Morris, head of energy research at VettaFi.
Add Exposure to MLPs With These 2 ETFs
Investors can access MLPs with the Alerian MLP ETF (AMLP ) and the Alerian Energy Infrastructure ETF (ENFR ). AMLP and ENFR have returned over 29% and 18%, respectively, year to date through Sept. 25.
AMLP tracks the Alerian MLP Infrastructure Index (AMZI), a composite of energy infrastructure MLPs. Companies in the index earn most of their cash flow from midstream activities.
On the other hand, ENFR tracks the Alerian Midstream Energy Select Index (AMEI). The index is a composite of North American midstream energy infrastructure companies, comprising MLPs (25%) and corporations (75%).
To learn about the long-term growth drivers for midstream/MLPs, please join our upcoming webcast on Tuesday, Oct. 8, at 2 p.m. ET (register here ).
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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.
