For those who want to capture the oil boom in North America but are still wary about geopolitical risks and volatility in commodity prices, master limited partnership exchange traded funds can provide a more stable alternative.
CNBC’s Mad Money Jim Cramer argues that companies like Magellan Midstream Partners (NYSE: MMP) are a better way to capture the growth in the energy sector since MLP revenue do not go hand-in-hand with the spot price of oil, reports Lee Brodie for CNBC.
MMP account for large positions in many MLP-related ETFs. For instance, the Alerian MP ETF (NYSEArca: AMLP), the largest MLP ETF with over $9 billion in assets, has a 6.7% position in MMP, and the UBS ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) holds a 7.2% weight in Magellan. AMLP is up 9.7% and MLPI is up 13.9% year-to-date. [MLP ETFs Surge as Risk-Off Energy Investments Gain Favor]
As a pipeline operator, these companies generate the majority of their businesses from charging fees to access their pipelines. Essentially, these MLPs act as the toll booths in the oil highway.
“The bulk of Magellan’s business comes from transporting refined products like gasoline and diesel,” Cramer said. “They have 9,500 miles of refined product pipeline, along with 54 terminals and 42 million barrels of storage.”
As a partnership, MLPs act as a pass-through entity where the company’s income or losses pass through to individual owners of the partnership. Consequently, many investors have enjoyed attractive yields. For instance, AMLP has a 5.8% 12-month yield and MLPI has a 4.09% 12-month yield. Additionally, some companies are raising their payouts.