Master limited partnership exchange traded funds have been a good way for income-seeking investors to generate high yields, but the weakening energy prices have dragged on the market. In response, Amplify ETFs has come out with the first MLP-related ETF to actively hedge its exposure to oil prices.
On Thursday, Amplify ETFs launched the actively managed Amplify YieldShares Oil Hedged MLP Income ETF (BATS: AMLX). AMLX has a 0.85% expense ratio.
“We hedge against oil price declines when investing in MLPs to seek to reduce portfolio volatility and correlation to oil prices,” according to Amplify ETF.
Over the past decade during 80% of days where crude oil declined 2% or more, MLPs also saw a decline in value.
The active ETF is managed by Dustin Lewellyn, Chief Investment Officer of Penserra, whom has primary responsibility for implementing the ETF’s investment program and for the overall day-to-day management of the ETF. Ernesto Tong and Anand Desai, each a portfolio manager of Penserra, will serve as portfolio managers of the ETF and assist with the day-to-day management of the ETF.
AMLX invests in equity securities of energy MLPs and selectively hedges positions to limit the correlation of its performance to the price of West Texas Intermediate Crude Oil by including short exposure to oil futures contracts.
The majority of holdings will include MLPs associated with oil & gas production; integrated oil; oil refining/marketing; oilfield services/equipment; and oil & gas pipelines.
In general, MLPs are publicly traded partnerships engaged in the transportation, storage and processing of minerals and natural resources. MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.
Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
However, the recent plunge in oil prices have caused some to question the correlation with MLPs since lower prices caused U.S. crude oil production to fall off, which in turn meant less oil being transported through pipelines.
“Recent history has shown that oil price declines can have a significant impact on MLP share prices,” Christian Magoon, ETF industry veteran and CEO of Amplify ETFs, said in a note. “AMLX is an ETF designed to hedge the impact of oil on MLPs while seeking to provide income and professional management of the portfolio.”
Investors have typically looked at MLPs as a way to gain income, along with income growth potential, and access to an expanding energy industry.
MLP provide income potential as the firms typically pay out the majority of operating cash to investors on a quarterly basis. Looking ahead, MLPs may continue to grow distributions if there is increased energy demand and new energy infrastructure spending. MLPs may also be a play on the current Trump administration’s plans to expand its infrastructure spending, which may also include increased energy pipelines to transport the increasing need for oil to fuel our economy.
For more articles on oil ETFs, visit our Oil Category.
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.