Waiting for the energy sector to rebound seems like asking a lot of weary investors, but one way to wait things out with added compensation is with the Alerian Energy Infrastructure ETF (NYSEArca: 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 working to deleverage their balance sheets.

ENFR tempts with a dividend yield of 6.43% and while the fund has had its struggles this year, it is outpacing traditional energy ETFs as well as oil futures. The Alerian MLP Index (AMZ) and the Alerian MLP Infrastructure Index (AMZI) are two of the major MLP benchmarks and share some overlap with ENFR, which is a good thing on the dividend front.

“Overall, the vast majority of midstream MLPs either maintained or grew their distributions on a sequential basis,” according to new research from Alerian. “Compared to 3Q19, 50% of AMZ constituents and 45% of AMZI constituents grew their distributions. Notably, Crestwood Equity Partners (CEQP) announced a 4.2% distribution increase, its first raise since it cut in 2016. CEQP management indicated that annual distribution increases will be evaluated based on the expected free cash flow generation.”

Evaluating ENFR

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.

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.

“Overall, the outlook for midstream MLP distributions is still constructive,” notes Alerian. “As capital expenditures moderate across the industry, the resulting potential free cash flow generation could lead to further distribution increases or buybacks.”

For more on multi-asset strategies, please visit our Multi-Asset 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.

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