VettaFi’s Head of Energy Research Stacey Morris recently sat down with VettaFi writer Elle Caruso to discuss the Alerian MLP Index (AMZ), MLPs’ recent performance and outlook, and incorporating energy infrastructure in client portfolios.
Caruso: What is the objective of the Alerian MLP Index (AMZ)?
Morris: The Alerian MLP index — ticker AMZ — measures the performance of publicly traded partnerships and LLCs that earn most of their cash flows from qualified activities involving energy commodities. In short, it’s really the leading gauge of energy infrastructure MLPs, and serves as a benchmark for the energy infrastructure/MLP space.
Caruso: What’s special about this index?
Morris: Well, it was the first real-time MLP index when it launched back in 2006, so it has a very long history. It was also the underlying index for the first passively managed MLP exchange traded product, which we know today is the JP Morgan Alerian MLP Index ETN (AMJ). It’s arguably our flagship MLP index, and still tends to be the most cited index for just general MLP performance.
Caruso: What is the typical index yield?
Morris: The 10-year average yield is right around 8%. More recently, the yield has been between 7% and 8%. MLP yields in general tend to be consistently more generous than you’ll find from corporate bonds, REITs, or utilities.
But importantly, MLP yields don’t fluctuate with interest rates. So, if interest rates end up falling this year, it shouldn’t really have any impact on the type of yields the MLPs can provide.
Caruso: How has performance been in recent years, and what’s your outlook for the MLP space?
Morris: Performance has been really strong over the last three years. The AMZ outperformed the S&P 500 in 2021, 2022, and 2023. At the end of 2023, the three-year annualized total return for the index was 32.5%. So we’ve seen really good returns over the last few years.
The outlook for the space remains very constructive. We expect companies to continue to focus on generating free cash flow and using that excess cash flow to grow their distributions and, in some cases, buy back equity.
In terms of outlook for 2024, I expect oil and natural gas prices to be range bound and somewhat challenged. I think in that type of backdrop, MLPs’ defensive qualities, their fee-based business models, and stable cash flows can be particularly helpful.
Caruso: How can investors use MLPs/energy infrastructure investments in portfolios?
Morris: Typically, we’ll see people use MLPs in the income sleeve of portfolios. Obviously, given the generous yields, that makes a lot of sense.
Typically, it doesn’t take a lot of MLP exposure to enhance income of your income portfolio. We may see allocations around 5% or so. Also, MLPs can be a nice diversifier in an income portfolio because they have a relatively low correlation with other income investments. Again, you have yields that are independent of what’s going on in the interest rate environment.
Beyond income portfolios, we also see people use MLPs in just general equity portfolios. It can be a good diversifier there, because you probably don’t have exposure to MLPs unless you’ve sought it out. MLPs aren’t in your broad market indexes. So that tends to add to diversification.
Then we can also see it be used in a real asset portfolio. MLPs tend to do well in periods of high inflation. They have long-term contracts that are often indexed to inflation, and so we can also see it used in a real asset sleeve of portfolios as well.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
AMZ is the underlying index for the JP Morgan Alerian MLP Index ETN (AMJ), which matures in May 2024, and the JPMCFC Alerian MLP Index ETN (AMJB), which matures in 2044. AMZ is also the underlying index for the ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN (MLPR).
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMJ, AMJB, and MLPR, for which it receives an index licensing fee. However, AMJ, AMJB, and MLPR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMJ, AMJB, and MLPR.