The ALPS Alerian MLP ETF (NYSEArca: AMLP) is rebounding nicely to close 2019. The largest ETF dedicated to master limited partnerships (MLPs) gained almost 1% on Thursday, pushing its gain over the past week to 7%.

AMLP seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.

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.

Some market observers believe AMLP offers near-term potential, but add it could be volatile over the medium- to long-term.

Getting A Handle On MLPs

“AMLP closed higher for three days in a row by +6.12%, and sizeable upside call options traded in the expiration and strike price we referenced,” Rareview Macro founder Neil Azous in a recent note. “In fact, the MLP Index had back-to-back +2% days for the first time since January 3rd, 2018, 706 days ago. Also, this performance was accompanied by volume confirmation, which was 2-4 times more than normal over the last two days.”

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.

“This is far from a victory lap as MLP’s can crush your soul just as fast they can lift your spirit. The key point here is that MLP’s have very high volatility, and they just entered a ‘big-wave’ surfing contest. So, trade accordingly!,” said Azous.

The recent trend of eliminating incentive distribution rights (IDRs) is another catalyst for MLP ETFs like AMLP.

“Multiple simplification transactions have been announced this quarter. IDR buyouts have been frequent in 2019, with the GPs of EQM Midstream, Phillips 66 Partners, and Summit Midstream Partners, among others, eliminating their MLPs’ IDRs earlier this year,” Alerian said in a recent note.

For more information on master limited partnerships, visit our MLPs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.