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Here's Why MLP ETFs Stood Out in Q3 Despite Oil Plunge
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Oil ETFs like United States Oil ETF (USO - Free Report) and United States Brent Oil ETF (BNO - Free Report) slumped 22% and 18%, respectively, in the past three months (as of Sep 23, 2022), due to global recessionary fears and a likely fall in demand. A surging greenback has also been weighing on the broad-based commodities as the latter is priced in the U.S. dollar.
Although the fate of energy players is highly dependent on oil and gas prices, stocks belonging to midstream MLPs have lower exposure to volatility in commodity prices. This is because midstream players generate stable fee-based revenues since the transportation and storage assets are being booked by shippers for the long term.
Thus, their business model is relatively low-risk, signifying considerably lower exposure to both oil and gas price and volume risks. As a result, Energy and Pipeline - Master Limited Partnerships added 11.9% gains in the past three months.
Lure of Dividends
MLPs are known for their high-yielding nature as they do not pay taxes at the entity level and can thus pay out most of their income (more than 90%) in the form of dividends like the REIT firms. While most traditional income asset classes produced miniscule yields, MLPs lured investors with their higher payouts.
Yes, MLPs underperform in a rising rate environment as these have to depend on the debt market to finance their operations or fresh projects. Naturally, higher rates amid the Fed tightening cycle would cut back their profitability. But investors should note that many MLPs use a fixed rate debt for their borrowings.
Most MLP ETFs offer benchmark-beating yields. The highest yield is provided by the MLP ETF InfraCap MLP ETF (AMZA - Free Report) (9.37% annually) followed by Global X MLP ETF (MLPA - Free Report) (yields 8.22% annually) and Alerian MLP ETF (AMLP - Free Report) (yields 7.99% annually). The benchmark U.S. treasury yield currently stands at 3.69%, way lower than those yields offered by MLP ETFs.
Strong Industry Rank
The dual benefits of decent oil prices and a high-yielding nature amid Fed policy tightening might favor MLP ETF investing at the current level. Investors should note that the Zacks Industry Rank of the energy and pipeline MLPs is in the top 9%.
ETF Choices
Below, we highlight a few MLP ETFs that were in the green in the last three months and have decent dividend yields.
Image: Bigstock
Here's Why MLP ETFs Stood Out in Q3 Despite Oil Plunge
Oil ETFs like United States Oil ETF (USO - Free Report) and United States Brent Oil ETF (BNO - Free Report) slumped 22% and 18%, respectively, in the past three months (as of Sep 23, 2022), due to global recessionary fears and a likely fall in demand. A surging greenback has also been weighing on the broad-based commodities as the latter is priced in the U.S. dollar.
Although the fate of energy players is highly dependent on oil and gas prices, stocks belonging to midstream MLPs have lower exposure to volatility in commodity prices. This is because midstream players generate stable fee-based revenues since the transportation and storage assets are being booked by shippers for the long term.
Thus, their business model is relatively low-risk, signifying considerably lower exposure to both oil and gas price and volume risks. As a result, Energy and Pipeline - Master Limited Partnerships added 11.9% gains in the past three months.
Lure of Dividends
MLPs are known for their high-yielding nature as they do not pay taxes at the entity level and can thus pay out most of their income (more than 90%) in the form of dividends like the REIT firms. While most traditional income asset classes produced miniscule yields, MLPs lured investors with their higher payouts.
Yes, MLPs underperform in a rising rate environment as these have to depend on the debt market to finance their operations or fresh projects. Naturally, higher rates amid the Fed tightening cycle would cut back their profitability. But investors should note that many MLPs use a fixed rate debt for their borrowings.
Most MLP ETFs offer benchmark-beating yields. The highest yield is provided by the MLP ETF InfraCap MLP ETF (AMZA - Free Report) (9.37% annually) followed by Global X MLP ETF (MLPA - Free Report) (yields 8.22% annually) and Alerian MLP ETF (AMLP - Free Report) (yields 7.99% annually). The benchmark U.S. treasury yield currently stands at 3.69%, way lower than those yields offered by MLP ETFs.
Strong Industry Rank
The dual benefits of decent oil prices and a high-yielding nature amid Fed policy tightening might favor MLP ETF investing at the current level. Investors should note that the Zacks Industry Rank of the energy and pipeline MLPs is in the top 9%.
ETF Choices
Below, we highlight a few MLP ETFs that were in the green in the last three months and have decent dividend yields.
InfraCap MLP ETF (AMZA - Free Report) – Up 11.50%; Yields 9.55% annually
Alerian MLP ETF (AMLP - Free Report) – Up 9.63%; Yields 6.09% annually
UBS ETRACS Alerian MLP Index ETN Series B (AMUB - Free Report) – Up 7.36%
UBS ETRACS Alerian MLP Infrastructure Index ETN (MLPB - Free Report) – Up 7.35%
JPMorgan Alerian MLP Index ETN (AMJ - Free Report) – Up 7.34%
First Trust North American Energy Infrastructure (EMLP - Free Report) – Up 3.19%; Yields 3.20% annually