With competitive high yields and exposure to an expanding energy industry, master limited partnership exchange traded funds are an attractive option for investors seeking to diversify their investment portfolios.
On the recent webcast, Discover MLPs: Investing in America’s Energy Renaissance, Manish Jain, fixed-income portfolio manager at Zacks Investment Management, explains that MLPs provide investors with exposure to midstream, or energy infrastructure, companies.
John Vaughan, senior V.P. and portfolio strategist at Direxion Investments, also points out that technological advances and the abundant resources in the U.S., namely advances in shale oil extraction, will help support the MLP industry. Moreover, limited infrastructure could lead to growth opportunities in the space ahead.
Due to the company structure, “MLP distribution yields are attractive,” Jain added.
Specifically, Jain points out that MLPs distribution yields averaged 5.18% as of the end of August, compared to 5.96% in high-yield bonds, 3.55% for real estate investment trusts, 2.54% in 10-year Treasuries and 1.96% for the S&P 500.
In addition, the asset class helps investors diversify their portfolios. MLPs show a 0.53 correlation to the S&P 500, a 0.23 correlation to U.S. bonds and a -0.41 correlation to Treasuries. The negative correlation to Treasuries also indicate that MLPs may hold up in a rising rate environment.
“MLPs have historically offered low correlation to traditional asset classes, especially fixed income,” Jain said.
According to a recent survey, the majority of financial advisors believe MLPs will react negatively to rising interest rates. As rates rise the cost of capital will also increase, which could result in lower distributions.
However, Corey Hoffstein, CIO and portfolio manager at Newfound Research, also believes MLPs will hold up in rising rate environment, pointing to outperformance in the Alerian MLP compared to the S&P 500 following the last two periods of rising rates.
The Direxion Zacks MLP High Income Shares (NYSEArca: ZMLP) is one way for investors to play the space. Jaime Adams, managing director at Zacks Invesment Management, specifies that the ETF screens for North American listed MLPs by share price, market cap and liquidity before ranking the MLPs based on short-interest and dividend yield. Only the top 25 are selected and equally weighted. ZMLP also has an annualized distribution rate of 7.19%, according to Direxion.
Financial advisors who are interested in learning more about master limited partnerships can listen to the webcast here on demand.