MLP ETFs Could be Ready to Rally

After ranking as one of last year’s worst-performing asset classes, master limited partnerships (MLPs) and the relevant exchange traded funds could be poised for brighter days later this year.

Once beloved income-generating asset classes, master limited partnerships and sector-related exchange traded products have tumbled in unison with oil and natural gas prices last year. Investors are worried that a traditionally attractive dividend-paying asset would no longer be able to maintain its steady payouts as U.S. oil output starts to decline after the steep drop-off in crude prices. In the recent crude oil sell-off, investors did not distinguish MLPs from other energy-related assets and dumped the asset as crude oil prices plummeted.

The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and Alerian MLP ETF (NYSEArca: AMLP), two of the largest MLP exchange traded products, are down an average of almost 37% over the past 12 months. The dark clouds could begin to pass as soon as this month if some analysts are correct in their views on the MLP space.

“January is generally a good month due to distribution announcements, and we believe the market is now discounting slower distribution growth. For the third straight year, MLPs are off to a weak start, but distribution announcements from the better positioned MLPs (three MLPs increased distributions last week) should begin to have more of a lasting positive impact,” according to a D.A. Davidson note posted by Amey Stone of Barron’s.

MLPs primarily deal with the 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. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.