As the Federal Reserve contemplates hiking its interest rates, some investors should think about shifting their portfolio positions, especially exchange traded funds that track master limited partnerships.
In a recent note entitled, “from feast to famine,” Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett pointed to MLPs as the most vulnerable to rising interest rates, reports Julie Verhage for Bloomberg.
The team of analysts calculated that during the years of near zero interest rate policies, or so-called Zirp, MLPs have experienced robust inflows as investors turned to alternative income-generation assets. MLPs have been attractive yield-generating investments as the partnership needs to distribute most of its cash flows to investors as dividends in order to be legally classified as an MLP.
For instance, the Alerian MLP ETF (NYSEArca: AMLP), the largest master limited partnership related ETF, has a 7.01% 12-month yield. AMLP has also attracted $1.18 billion in net inflows over the past year, according to ETF.com.
However, MLPs have experienced the least amount of outflows, among other yield-generating assets, in more recent weeks and months, even after the Fed stated that it is thinking about hiking rates some time this year. For example, over the past month, AMLP only saw $4.7 million in outflows.
The huge inflows into the MLP investments during the low interest rate environment, along with tepid outflows from the asset class in recent week following the Fed’s rate outlook, suggest that investors could pull out of MLPs once rates rise.
Selling pressure is already underway as many MLP-related ETFs have been declining. For instance, on Friday, AMLP, Global X MLP ETF (NYSEArca: MLPA), Yorkville High Income MLP ETF (NYSEArca: YMLP) and Direxion Zacks MLP High Income Shares (NYSEArca: ZMLP) all touched new 52-week lows.
Over the past year, AMLP declined 9.8%, MLPA fell 9.6%, YMLP plunged 35.5% and ZMLP retreated 24.6%.
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.