MLP ETFs: Vulnerable to Rising Rates?

Years of easy liquidity and low interest rates benefited one asset class in a big way. Master limited partnerships, or MLPs, have feasted on low rates on two fronts. First, MLPs are capital-intensive businesses and low financing costs have meant less money going out the door to service debt. That brings up the second point, which is those same low borrowing costs have meant more cash going to shareholders in the form of dividends.

It has been those steadily rising payouts and juicy yields that have sent so many investors into MLPs and related ETFs and ETNs in what has previously been a low interest rate environment. Assets under management tallies tell the tale. For example, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), with a yield of almost 4.7%, has nearly $3.1 billion in assets. The Alps Alerian MLP ETF (NYSEArca: AMLP) yields 5.87% and has over $6.3 billion in assets. [A Closer Look at MLP ETFs]

Rising rate fears have taken some of the wind out of the MLP trade. From May 20 through June 5, AMJ tumbled 7.7% while AMLP lost about 4%. Both have subsequently rebounded a bit, but it could take more than just a few days of positive price action to calm investors’ nerves about rising interest rates and the ensuing impact on MLPs. [MLP ETFs: Attractive Yields And Risks]

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