Most income investors will know at least a little about Master Limited Partnerships more commonly referred to as MLPs. Most MLPs are tied to the transportation of energy products. They collect royalties as the energy product moves through their pipeline (this is a very common structure). Fundamentally, the movement of MLPs should not be vulnerable to price movements of the underlying energy product. The royalty collected is what it is.
This is the generally accepted truthism about MLPs and most of the time it is correct but not always. The following chart from Google Finance tracks a large MLP exchange traded product in blue versus a large energy sector ETF in Red, we’ll get to the yellow line in a moment.
The royalties may not change but the price action of the two look very similar. In past declines MLPs have many times been spared but not always as was the case over the last month. You might think of course they will snap back and while that will probably turn out to be correct, someone sold at the lows, perhaps in a state of heightened emotions and now likely regrets (another emotion) the sale.
Of course MLPs could be vulnerable to lower demand; less oil moving through the pipeline would result in less royalty income.
The yellow line is a relatively large Business Development Company (BDC) that had a similar even if not exact decline as the MLP fund during the essentially the same period of time. The charted BDC was not an island, one of the BDC ETPs was down in lockstep with the charted individual name. Again, there has been snapback in both but also again, someone sold at the lows.