In a rough year for oil prices, master limited partnerships (MLPs) and the related exchange traded products, are facing some challenges. On the other hand, MLPs and energy infrastructure plays remain compelling for income-starved investors.
One of the more solid ideas in this category is the BMO Dorsey Wright MLP Index Exchange Traded Note (BMLP). BMLP tracks the DWA MLP Select Index (DWAMLP), an equally weighted benchmark of 15 MLPs that are weighted using Dorsey Wright Associates (DWA) proprietary relative strength methodology. BMLPs holdings are currently showing outperformance relative to their peers within the index universe.
DWAMLP recently turned five years old and while past performance isn’t a promise of future returns, it’s worth noting the index is developing a penchant for topping rival MLP benchmarks.
“While the state of the energy market has been in constant flux since the launch of the DWAMLP, the methodology and the robust process employed by the index has remained constant, and it has provided a dynamic way of tracking and accessing this important investment space,” according to Nasdaq Global Indexes. “Additionally, the DWAMLP has managed to outperform, on a total return basis, its benchmarks as well as a crude oil since it launched.”
At a time when interest rates are at historic lows and cash investments are hardly worth the trouble, BMLP’s distribution yield of 10.71% stands out.
MLPs charge a fee for each barrel of petroleum or MMcf of natural gas transported. This covers smaller pipelines connecting wells to hubs or processing facilities for natural gas, which are more sensitive to production dynamics, along with Larger, longer pipelines that connect hubs or producing regions with end markets. These MLPs typically charge rent for third parties to use storage tanks.
“One of the major advantages that MLPs provide to investors is the periodic income stream due to the quarterly cash distribution and high dividend yields,” notes Nasdaq. “Because of their structure, MLPs also provide investors with nice tax advantages. For example, MLPs are not taxed at the corporate level. Instead, each unitholder is taxed on his or her portion of MLP earnings, which helps avoid the double taxation most corporations must pay.”
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.