Exchange traded funds tracking master limited partnerships (MLPs) have tumbled alongside traditional energy stocks this year, but with oil prices rebounding, some MLPs and the related ETFs are notching impressive December performances.
For example, the Global X MLP ETF (NYSEArca: MLPA) is up more than 7% this month while the Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX) is higher by nearly the same amount.
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.
MLPs are also seen benefiting from the Trump Administration’s tax reform effort.
“The U.S. House of Representatives passed a tax plan that would reduce the income tax rate from pass-through entities (including MLPs) to 25%. This measure was included to ensure that pass-throughs maintain a tax-advantaged status versus corporations, which would also enjoy a tax cut. The Senate introduced a separate tax plan for publicly traded partnerships (including MLPs) that would allow for a 23% deduction on income received from these entities,” according to Global X research.
MLPs provide income potential as the firms typically pay out the majority of operating cash to investors on a quarterly basis. Looking ahead, MLPs may continue to grow distributions if there is increased energy demand and new energy infrastructure spending. MLPs may also be a play on the current Trump administration’s plans to expand its infrastructure spending, which may also include increased energy pipelines to transport the increasing need for oil to fuel our economy.
“The current yield on MLPs stands at 8.28%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.68%), Emerging Market Bonds (5.38%), Fixed Rate Preferreds (5.33%), and REITs (3.91%). MLP yield spreads versus 10-year Treasuries currently stand at 5.86%, higher than the long-term average of 3.81%,” according to Global X.
For more articles on oil ETFs, visit our oil category.