As investors return to the markets, many are sifting through the wreckage to pick up a bargain, and master limited partnerships-related ETFs show promising valuations, along with attractive yields.
“Our four portfolio managers all think MLPs or midstream energy in general is relatively cheap,” Gary Henson, President and Senior Managing Partner for Tortoise Capital Advisors, said at the Charles Schwab IMPACT 2018 conference.
“If you’re looking for some level of valuation that looks attractive, we would argue midstream looks pretty attractive,” he added.
Investors who are interested in MLPs have a number of options to choose from, including Tortoise North American Pipeline Fund (NYSEArca: TPYP). The Tortoise North American Pipeline Fund tracks the Tortoise North American Pipeline Index, a float-adjusted, cap-weighted index comprised of U.S. and Canadian pipeline firms.
TPYP provides broad access to the entirety of North American pipelines, including pipeline corps, master limited partnerships and MLP affiliates, which help diminish exposure to commodity price sensitivity by focusing on midstream energy names.
The ETF is also structured as a regulated investment company, as opposed to a C-corporation. MLP ETFs structured as a C corp. are required to pay corporate income tax on distributions before the distributions are passed through to investors, which may cause wider tracking errors compared to the performance of the underlying MLPs. On the other hand, TPYP and other RICs limit holdings to 25% MLPs, which make them more tax efficient.
To qualify as an MLP, the companies pass through at least 90% of their income to investors, making the assets an attractive yield-generating investment.
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, 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.
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