MLP ETFs Offer Yield and Long-Term Value
September 27th 2012 at 8:00am by Tom Lydon
Exchange traded funds that track master limited partnerships, or MLPs, help generate attractive yields and will provide investors with exposure to long-term infrastructure expansion.
“MLPs have been under followed but are now getting a lot of attention,” Kenny Feng, CEO & President at Alerian, said in a webcast hosted by ALPS, which sponsors Alerian MLP ETF (NYSEArca: AMLP).
Looking at benchmark 10-year Treasury yields of about 1.6%, it is no wonder investors are beginning to branch out to alternative income-generating assets. Feng projects that the average spread between MLPs and the U.S. 10-year Treasury notes will remain between 3 and 5 percentage points.
MLPs build, acquire and operate transportation assets. While MLPs are associated with energy, specifically natural gas and crude oil, they are more involved with transporting the commodities. Consequently, the performance of MLPs is less dependent on commodity prices than on how much of the commodity is pushed through.
Investors should think of MLPs as a toll-road business based on how much traffic goes through, Feng explained.
“It doesn’t matter if you drive a Honda Civic or an Aston Martin, you will be charged the same down a toll road,” Feng said. “Pipeline and storage businesses charge the same price to move or store a $30 barrel as they do a $150 barrel of oil.”
For the long-term investor, MLPs provide a necessary service, and the business is on the rise. Interstate oil pipelines are federally mandated to increase by the producer price index plus 2.65% every July 1st. On the volume side, energy demand in the U.S. has increased an average 1% per annum over the past 30 years. In the U.S., about $243 billion will be invested in infrastructure over the next 25 years to expand natural gas distribution.
Additionally, the MLP Parity Act will expand the definition of “qualified” sources to include renewables, such as biomass and geothermal sources into the structure.
Exchange traded products that invest in MLPs include:
- Alerian MLP ETF (NYSEArca: AMLP): 6.10% yield
- JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ): 5.02% yield
- Yorkville High Income MLP ETF (NYSEArca: YMLP): 8.44% yield
- Global X MLP ETF (NYSEArca: MLPA): 6.08% yield
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.