The energy patch is notoriously volatile and more of that turbulence is expected well into next year, but investors can dial back on that risk with midstream assets, including 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. Importantly, many midstream MLPs and energy infrastructure companies are looking to bolster their renewables exposure.
“The global oil and gas industry’s recovery from coronavirus-related market disruptions will depend on gradually increasing demand as economic activity picks up, particularly in China, Southeast Asia, and the U.S.,” Moody’s wrote in an Aug. 23 report. “The recovery will likely be uneven, with the pandemic unsettling long-term energy consumption patterns and heightening volatility in oil and gas prices.”
ENFR For Reduced Rockiness
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.
“Crude oil and natural gas prices will remain volatile through the end of 2021, as supply and demand face an ongoing rebalancing act following the economic and market fallout caused by the COVID-19 pandemic, according to analysts,” reports S&P Global Market Intelligence.
Midstream and MLP businesses are included in the ETF strategies because the segment is fundamentally related to the sector company businesses, can potentially increase yield generation, and are historically excluded from S&P 500 and Dow Jones Averages, providing another layer of diversification benefits
“However, Moody’s warned that the closer crude prices get to $50/bbl, the more likely it becomes that producers will return output that was idled as demand and prices crashed during the onset of the pandemic,” according to S&P Global Market Intelligence. “Another supply glut in the wake of still recovering consumption could send oil prices tumbling again.”
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.