In a lower-for-longer yield environment, fixed income investors can turn to master limited partnerships and related exchange traded funds to bolster yield generation.
“A spoonful of midstream/MLPs or closed-end funds can help remedy lower yields in your income portfolio,” Stacey Morris, director of research at Alerian, said in a research note.
Morris argued that advisors or investors who looking to enhance yield can do so with a relatively modest allocation to midstream/MLPs or closed-end funds to help raise a portfolio’s income.
Specifically, Morris pointed out that traditional sources of yield like bonds, the S&P 500, utility stocks, and real estate investment trusts are showing yields below their 10-year average. REITs now provide an average yield of around 2.74%, utilities at 3.05%, bonds at 1.43%, and the S&P 500 at 1.34%.
On the other hand, the AMEI Index and midstream MLPs, represented by the Alerian MLP Infrastructure Index (AMZI), showed yields at 8.01% or above their 10-year averages of 7.51% at the end of August. Additionally, the Midstream Index (AMEI) had a 5.84% yield, compared to its 5.40% 10-year average yield.
Morris also argued that in addition to enhancing yield, midstream/MLPs can provide other portfolio benefits like real asset exposure and diversification due to MLPs’ exclusion from broad market indexes.
“In summation, while lower yields across several asset classes can make it challenging to build a new income portfolio and achieve a certain yield objective today, a modest allocation to midstream/MLPs or closed-end funds can help boost a portfolio’s income profile to offset lower yields elsewhere,” Morris said.
To keep tabs on the master limited partnerships and midstream energy space, investors can look to related ETF strategies, such as the ALPS Alerian MLP ETF (NYSEArca: AMLP), the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), the Alerian Energy Infrastructure ETF (ENFR), and the ETRACS Alerian Midstream Energy Index ETN (NYSEArca: AMNA).
For more news, information, and strategy, visit the Energy Infrastructure Channel.