Exchange traded funds dedicated to high-yielding master limited partnerships (MLPs) have been struggling alongside traditional energy equities as oil prices are tumbling. However, there are incremental signs of life for MLP funds.
The Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) gained more than 2% last week while the ALPS Alerian MLP ETF (NYSEArca: AMLP), the largest exchange traded fund holding MLPs, jumped 3% on the week.
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.
“The current yield on MLPs stands at 7.12%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.41%), Preferreds (5.40%), Emerging Market Bonds (5.37%), and REITs (4.02%),:” according to Global X research. “MLP yield spreads versus 10-year Treasuries currently stand at 4.82%, higher than the long-term average of 3.69%.”
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.
“The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased marginally in July compared to June as higher oil prices helped MLP unit prices. Since July 2016, the EV-to-EBITDA ratio has increased by approximately 14.60%,” according to Global X.
Related: Why You May Need MLPs in Your Portfolio in 2017
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.
MLPX has seen third-quarter inflows of over $24 million while investors have added nearly $176 million to AMLP in the current quarter.
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