Energy is the best-performing sector in the S&P 500 this year and the only one that’s higher on a year-to-date basis, but recession jitters could prompt a material pullback in oil prices, hampering energy equities and exchange traded funds in the process.
It remains to be seen if that scenario materializes in earnest, but investors can prepare for it while generating significant income with midstream energy assets and shares of pipeline operators. Those assets are accessible via an array of ETFs, including the VanEck Vectors Energy Income ETF (EINC).
EINC is higher by 6.73% year-to-date, and the VanEck ETF sports a dividend yield of 5.49%. That’s well above what investors get with broad market equity funds and basic energy sector ETFs, and it’s far higher than the yields on a variety of fixed income assets on the market today.
“For many months the energy sector was the lone bright spot in a turbulent market. But recently the group’s gotten hit by a downturn in the broader market,” reported Pippa Stevens for CNBC. “The Federal Reserve has taken an aggressive approach to raising interest rates in an effort to combat inflation, which is at the highest rate in 40 years. There are growing fears that rapidly rising rates will wind up tipping the economy into a recession. If that happens, energy consumption — and prices — could fall.”
The toll road nature of pipeline companies, including EINC components, can provide some buffer against declining energy commodity prices. Midstream energy companies don’t extract and produce crude oil and natural gas. Rather, these firms get paid to store and transport those commodities.
“Pipeline companies aren’t as levered to commodity prices as their upstream counterparts. These midstream players are sometimes described as toll companies. They get paid a fee for storage and transport of oil, natural gas and other liquids. They typically get paid by volume,” according to CNBC.
EINC, which is more than nine years old, follows the MVIS North America Energy Infrastructure Index and is home to 30 stocks. The ETF’s roster features some midstream names analysts are constructive on, including Williams Cos. (NYSE:WMB) and Kinder Morgan (NYSE:KMI). That duo combines for over 14% of the EINC portfolio, according to issuer data.
Adding to the allure of EINC is the point that in recent years, midstream balance sheets have become increasingly sturdy. That’s a sign that these operators can support dividend obligations and, in some cases, repurchase their own shares.
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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.
