When income investors turn to the energy space, they often turn to high yielding master limited partnerships (MLPs). That asset class is accessible via exchange traded products such as the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and the ALPS Alerian MLP ETF (NYSEArca: AMLP), the two largest MLP-related exchange traded products.
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.
While energy is the worst-performing sector in the S&P 500 to this point in 2017, MLPs are faring better. For example, AMLP is up 2.6% year-to-date. AMLP currently yields nearly 7.5%, or more than triple the yield investors will find on 10-year U.S. Treasuries.
“In other words, a $1 million investment in the Alerian MLP ETF could be expected to give you annual distributions of $74,900, based on the current share price. Its annual management fee is 0.85% of assets. The current prospectus also includes 0.57% held for deferred taxes, which brings the total expense ratio to 1.42%,” reports Philip Van Doorn for MarketWatch.
Earlier this year, MLPs strengthened after President Trump took steps to advance the Keystone XL and Dakota Access pipelines, revealing the new administrations looser constraints on the oil industry, Bloomberg reports.
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.
“If you’re looking for income and believe oil isn’t set for another major decline, and that we’re still in the middle of a market recovery for oil and MLPs, then this is a good time to consider the Alerian MLP ETF. If you buy the ETF, you will have to be patient, but you can take solace in the fact that you will receive high income. If your objective is steady long-term growth, then this type of investment is not for you,” according to MarketWatch.
For more information on master limited partnerships, visit our MLPs category.