Outlook for MLP Distributions Remains Strong | ETF Trends

Investors looking for higher yields may consider increasing their exposure to MLPs. 

In this challenging economic climate, investors are looking for income wherever it exists to protect their portfolios and offset decades-high inflation. Stocks ended the first half of 2022 with the worst returns in over 50 years, as inflation concerns, Fed rate hikes, and slowing economic growth weighed on markets. The S&P 500 posted a loss of 20%, with energy being the only sector to post a gain YTD across the cap spectrum.

Despite the broad energy sell-off in June, the outlook for MLP distributions remains strong, given solid fundamentals, continued free cash flow generation, and commodity price levels that incentivize measured growth from U.S. oil and gas producers, Stacey Morris, CFA, head of energy research for VettaFi, wrote in a recent insight

Last month’s sell-off has put MLP index yields above their 10-year averages for the first time since December 2021. The Alerian MLP Infrastructure Index (AMZI) was yielding 8.16% at the end of June compared to its 10-year average of 7.61%, according to Morris.

There have been no cuts across the Alerian energy infrastructure index suite for three straight quarters, and on a year-over-year basis, more than 80% of AMZI by weighting has increased payouts, Morris wrote. 

Income investors positioning for the worst may have already shifted more of their portfolios into utilities due to their defensiveness. Utilities have been largely resilient; however, the yield was practically in line with that of the 10-Year Treasury (3.05% vs. 3.02%), according to Morris.

“Investors looking for higher yields could move some of their utilities exposure to MLPs dependent on their risk tolerance. The ten-year standard deviation for MLPs is about twice that of utilities, but within the energy space, MLPs are a more defensive subsector given their fee-based business models,” Morris wrote. “In other words, MLPs generate stable cash flows, but equity values can be volatile as the space largely trades more in line with oil prices and energy stocks.”

Investors looking to gain exposure MLPs may consider the Alerian MLP ETF (AMLP), which tracks AMZI. AMZI is a capped, float-adjusted, capitalization-weighted composite of energy infrastructure MLPs that earn the majority of their cash flow from midstream activities including the transportation, storage, and processing of energy commodities.

For more news, information, and strategy, visit the Energy Infrastructure Channel.

vettafi.com is owned by VettaFi, which also owns the index provider for AMLP. VettaFi is not the sponsor of AMLP, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.