Count master limited partnerships (MLPs) and the related exchange traded products among the asset classes benefiting from Donald Trump being in the White House. That includes the Global X MLP ETF (NYSEArca: MLPA), which gained more than 3% last week to push its one-year gain north of 34%.
Last week, MLPs strengthened after Trump took steps to advance the Keystone XL and Dakota Access pipelines, revealing the new administrations looser constraints on the oil industry, Bloomberg reports.
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.
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.
The shift in policy on U.S. energy pipelines is a major departure from the Obama administration, which previously rejected TransCanada Corp.’s Keystone Proposal in 2015 and kept the Dakota Access blocked since September. The policy change will be a boon for the oil industry, allowing companies to expand infrastructure and ease transportation bottlenecks.
“Since the period of heightened volatility in early 2016, volatility has stabilized at just below 20%, two-thirds lower than the peak of MLP market volatility. Volatility has remained under 20% for the past two months. West Texas Intermediate crude prices increased last month, up 8.66% to $54/barrel. In addition, correlations between MLPs and other asset classes fell considerably as investors weighed the ramifications of the late-November OPEC agreement. We have found that when oil prices rise, correlations between MLPs and crude decrease,” according to recent Global X research.
MLPA yields close to 7%, which is sure to entice some income investors, however there are other issues to consider.
Demand for oil in the U.S. could also rise along with a strengthening economy. Trump has promised a number of expansionary economic policies, such as increased fiscal spending and corporate tax cuts, that could fuel growth. As demand for raw materials rises in an expanding economy, MLPs may enjoy greater oil traffic through their pipelines.
For more information on master limited partnerships, visit our MLPs category.