It’s a Great Time for MLP ETFs

Income-minded investors who are looking for alternative avenues of yield generation may consider master limited partnership exchange traded funds.

“MLP is being the primary funder of midstream pipelines. [It] really puts them at the core of U.S. energy, and that production is all through the room, so we think it’s a great time for MLPs,” John Jacobs, Chairman of Alerian, said at Inside ETFs 2019.

With the Federal Reserve easing off interest rate hikes with a more patient stance and crude oil prices surging this year, it may be a good time to look at the MLP space.

Investors who are interested in the category can look to ETFs like the ALPS Alerian MLP ETF (AMLP A) to gain exposure to MLPs. The Alerian MLP ETF is the largest and most liquid MLP-related ETF on the market. AMLP provides diversified, transparent exposure to a basket of infrastructure MLPs and shows a 8.1% 12-month yield.

In a rising rate or inflationary environment, MLPs are able to grow distribution and help investors generate attractive yields to offset the downsides, especially in respect to other equity income-oriented asset classes.

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.

MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, 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.

“Midstream is more defensive than other sectors of energy because cash flows are largely fee-based and thus more insulated from moves in commodity prices. While any negative performance is understandably frustrating for investors, midstream is performing as one would reasonably expect given the ~30% decline in oil prices since early October. Oil price weakness is a risk, but midstream is still the defensive place to invest in energy against the backdrop of a tough oil tape,” according to Alerian.