The ALPS Alerian MLP ETF (NYSEArca: AMLP), the largest exchange traded fund holding master limited partnerships (MLPs), is higher by more than 6% over the past three months as MLPs are benefiting from higher oil prices and investors’ thirst for higher-yielding assets. That quick run-up has some market observers pondering MLP valuations.
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.
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.
“While there is less upside after the strong upward move over the past four months, we believe the AMZI’s above average yield of 7.07% and yield spread of 548 basis points create a positive skew in the risk/reward profile. These metrics compare favorably with the average yield of 6.3% and average spread of 415 basis points over the past five years, plus the long-term median yield of 6.8% and median spread of 370 basis points based on data since 1996,” according to part of a D.A. Davidson note posted by Amey Stone of Barron’s.
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.