Obviously, the traditional energy sector is out of favor in a big way this year, but some analysts believe the group is poised to rebound, perhaps giving way to upside in exchange traded funds, such as the Alerian Energy Infrastructure ETF (ENFR).
ENFR tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs but limits the tax hit from solely owning MLPs.
“In a client note, Devin McDermott and other Morgan Stanley energy analysts note that energy and production companies and pipeline operators in the so-called midstream sector “are beginning to offer cash flow profiles competitive with the broader market for the first time in recent history,” reports Andrew Bary for Barron’s.
Energy (and ENFR) Considerations
For investors looking to get into the energy patch while reducing some of the volatility associated with instruments that are more correlated to crude price, ENFR makes some sense due to its midstream exposure.
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
“Morgan Stanley sees a more favorable political backdrop for the industry given the prospect of a Biden presidency and a divided Congress relative to pre-election expectations of full Democratic control in Washington,” according to Barron’s.
What’s interesting about ENFR over the near-term is that, assuming polls are accurate and Joe Biden emerges victorious, his energy policy may not be as crippling for oil and natural gas as previously thought.
“In general, we believe the actual energy path could trend more moderate relative to Biden’s pre-election platform, in part driven by lack of a Senate majority, which could moderate key appointees to federal agencies. Moreover, most of the more meaningful energy sector reforms require legislation, something that would have a very low likelihood of being implemented under a split government,” according to Morgan Stanley.
ENFR, which yields 8.84%, is higher by more than 2% over the past week.
Other MLP funds include the Global X MLP ETF (NYSEArca: MLPA) and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ).
For more on cornerstone strategies, visit our ETF Building Blocks 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.
