Broadly speaking, the energy sector is impressing this year, but that doesn’t mean opportunity is now limited in the group.
The midstream space beckons for intrepid investors as some members of this segment, including holdings within the Alerian Energy Infrastructure ETF (ENFR), currently look attractive. Making ENFR all the more interesting is that the Alerian Midstream Energy Select Index (AMEI) – ENFR’s underlying index – appears inexpensive relative to the broader market and the energy patch.
Another reason to consider midstream assets is that they’re often less volatile than exploration and production equities because midstream names aren’t as correlated to oil prices. Rather, midstream companies operate pipelines and storage facilities and engage in the transportation of oil and natural gas. Regardless of how crude prices are acting, there’s demand for the services ENFR holdings provide.
Those are among the reasons some market observers are bullish on ENFR holdings, including Canada-based Enbridge (NYSE: ENB).
“Enbridge owns a network of transportation and storage assets that connect some of North America’s richest oil and gas fields. As low-cost shale drilling continues to grow the continent’s energy production volumes, Enbridge should be able to see healthy demand for its pipeline and transportation facilities,” reports OilPrice.com.
Enbridge is ENFR’s largest holding at a weight of 10.87% as of Aug. 6, according to ALPS data. Another name some investors like is Enterprise Products Partners (NYSE: EPD), the largest U.S.-based midstream master limited partnership (MLP).
“Enterprise has clearly read the signs of the times and has begun to work with partners to scale back its project backlog. In the past, EP was able to weather the normal industry headwinds thanks to robust cash coverage and manageable leverage. Unfortunately, Covid-19 has been anything but your average downturn, and EP has been forced to seriously cut back on Capex,” according to OilPrice.
Enterprise is ENFR’s second-largest holding at a weight of 8,51%. Speaking of large percentages, the dividend yield on the ALPS ETF is 5.70%. That’s well above what investors earn on the S&P 500 or even high-yield corporate bonds.
Another perk with ENFR is the midstream business model, which is fee-based and demand-driven. That’s great for investors at a time when natural gas demand is soaring as is the export market for that commodity.
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
For more on cornerstone strategies, visit our Energy Infrastructure Channel.
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.