Master limited partnerships and related exchange traded funds have provided impressive capital appreciation, along with attractive yields, in a long-term portfolio.
According to First Trust Portfolios, the Alerian MLP Index has generated a cumulative total return of 1,231.8%, or an average annualized return of 19.4%, from Dec. 31, 1999 through July 31, 2014. In comparison, the S&P 500 energy index generated a total return of 346.2%, or an annualized return of 10.8%.
Year-to-date, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), which tracks the Alerian MLP Index, is up 10.9%, whereas the S&P 500 energy sector is 6.5% higher. [Damp Oil Volatility With MLP ETFs]
MLPs are limited partnerships that are traded on a U.S. exchange and traditionally generate large cash flows that payout the majority to investors as dividends. For instance, AMJ shows a 12-month yield of 4.52%.
Unlike other energy sector stocks, MLPs primarily deal with 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.
While MLPs distribute cash and their underlying value can be influenced by interest rate risk, the cash flow distributed by MLPs is not fixed. As a type of toll road business model, these companies generate revenue based on demand for the energy products, and the U.S. economy is still heavily reliant on oil.
“If interest rates are rising due to an acceleration in economic activity, the demand for energy could also rise, and that could boost revenues,” according to Bob Carey, Chief Market Strategist at First Trust. “The opposite scenario could apply as well.”
Since 2000, yields on benchmark 10-year Treasuries finished higher in five calendar years. Meanwhile, the Alerian MLP Index posted positive returns in each of those five years – 2003, 2005, 2006, 2009 and 2013.
“With the U.S. moving towards energy independence, investors may want to consider having exposure to both the distribution and production sides of the energy sector, in our opinion,” Carey added.
ETF investors can browse through plenty of other MLP and oil infrastructure-related ETF options on the market. Year-to-date, the First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) increased 11.8%, Yorkville High Income MLP ETF (NYSEArca: YMLP) rose 4.6% and Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) gained 17.7%. [A Rapid Ascent for This MLP ETF]
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.