ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs but limits the tax hit from solely owning MLPs.
A fund like ENFR can be a solid complement or alternative to traditional energy sector strategies like the Energy Select Sector SPDR (XLE ).
“Both midstream and the integrated majors can be thought of as defensive energy investments but for different reasons,” according to new research from Alerian. “Midstream MLPs and C-Corps are defensive by nature of their business models, collecting a fee for each unit of energy transported, stored, or processed. This limits midstream’s exposure to commodity price fluctuations in terms of cash flows, though prices can impact sentiment.”
Perks of the MLP Business Model
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.
Comparisons of midstream assets against the IXE, XLE’s underlying index, have recently been favorable.
“Comparing against the IXE, midstream again stands out for better performance this year and its generous yields,” notes Alerian. “However, the IXE boasts better credit quality based on the weighting of investment grade companies. The IXE has a higher correlation with WTI crude, which one would expect given the weighting towards E&Ps, as well as a higher correlation with the broader market. Midstream screens more favorably based on the Sharpe ratio, which is calculated using total return and goes back eight years based on the availability of IXE total return data.”
And yes, ENFR comes through on yield. Its dividend yield is about 170 basis points higher than XLE’s.
For more information on master limited partnerships, visit our Thematic Investing Channel.