The energy sector will finish 2020 as the worst-performing group in the S&P 500, but the Alerian Energy Infrastructure ETF (ENFR) is ripping higher to end the year, setting the stage for a continued recovery in 2021.
The ALPS ETF tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which helps investors capture some of the high yields from MLPs while limiting the tax hit from solely owning MLPs.
Energy’s recent resurgence is widely attributable to success on the coronavirus vaccine front. The faster a vaccine comes to market, the more rapidly demand will increase as industry ramps up and Americans unleash pent-up travel demand.
“In a year of significant macro headwinds, midstream has stood apart from the rest of energy for its defensive performance underwritten by the greater cash flow stability of its fee-based business model,” writes Alerian analyst Stacey Morris. “As oil and gas producers and oilfield service companies saw their 2020 and 2021 estimates slashed in the wake of the pandemic, the forward outlook for midstream earnings remained steady.”
ENFR Could Exude 2021 Excellence
For investors looking to get into the energy patch while reducing some of the volatility associated with instruments that are highly correlated to crude price, ENFR is a smart idea 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.
“Combining resilient cash flows with significant reductions to capital budgets, many midstream companies are anticipating or already generating significant free cash flow and have announced buyback programs as another means of returning cash to shareholders beyond generous dividends,” according to Morris. “While the energy sector is broadly pursuing free cash flow, investors can have greater confidence in midstream’s ability to deliver free cash flow independent of the oil price level due to the more predictable cash flows of the midstream business.”
ENFR is also a credible high-yield play on coronavirus vaccine progress.
“While less directly exposed to commodity prices, midstream still stands to benefit from any potential improvement in the outlook for the global economy and a recovery in oil demand supported by successful deployment of a vaccine,” notes Morris.
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.
