Still, the recent declines in MLP ETFs have been muted relative to other high-yield sectors such as preferred shares and real estate investment trusts.
Darren Schuringa, founder of Yorkville Capital Management, in a recent Barron’s interview said if an MLP’s borrowings are short-end dated, and interest rates start to move up, borrowing costs go up. The firm manages Yorkville High Income MLP ETF (NYSEArca: YMLP). [A Closer Look at Master Limited Partnership ETFs and ETNs]
Meanwhile, the prospectus for Alerian MLP ETF warns that rising interest rates are an industry-specific risk for the fund.
“A rising interest rate environment could adversely impact the performance of MLPs. Rising interest rates could limit the capital appreciation of equity units of MLPs as a result of the increased availability of alternative investments at competitive yields with MLPs,” according to AMLP’s prospectus. “Rising interest rates also may increase an MLP’s cost of capital. A higher cost of capital could limit growth from acquisition/expansion projects and limit MLP distribution growth rates.”
Noted portfolio manager Jeff Gundlach in May said that MLPs would feel the pain if interest rates rise because they have a lot of leverage and interest-rate risk, Barron’s reported.
JPMorgan Alerian MLP Index ETN
Full disclosure: Tom Lydon’s clients own AMLP.