Exchange traded products tracking master limited partnerships (MLPs) were thrashed when oil prices tumbled over the past two years, but with crude rebounding in 2016, some income investors are renewing their affinity for products such as the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and the ALPS Alerian MLP ETF (NYSEArca: AMLP).
AMLP is the largest master limited partnership-related ETF available, with close to $8 billion in net assets under management, is higher by more than 8% over the past month while the rival AMJ is up about 10% over that period.
Related: Downtrodden MLP ETFs May Offer Long-Term Opportunity
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.
Although AMJ and AMLP are on a torrid pace as of late, some MLP analysts see the asset classes as offering compelling value.
[related_stories]“The AMZI yield spread widened 5 basis points to 621 basis points as the yield moved down 2 basis points, but Treasury yields dropped by 7 basis points. While there is clearly less upside after the strong upward move over the past 11 weeks, we believe the AMZI’s above average yield of 7.9% and yield spread of 621 basis points create a positive skew in the risk/reward profile. These numbers compare favorably with the average yield of 6.3% and average spread of 394 basis points over the past five years, plus the long-term median yield of 7.0% and median spread of 304 basis points based on data since 1996,” according to a D.A. Davidson note posted by Amey Stone of Barron’s.
With the markets flooded with oil and prices still depressed, basic economic theory suggests that consumption could rise to capitalize on the cheap crude. With higher consumption, MLP tollkeepers could profit off the increased transportation or storage of energy.
Related: Master Limited Partnership ETFs Are Back on Trend
To qualify as an MLP, the companies pass through at least 90% of their income to investors, making the assets an attractive yield-generating investment.
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, 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.
For more news on MLPs, visit our MLP category.