Master limited partnerships or MLPs have been under pressure this year. Alerian MLP ETF (AMLP - Free Report) is down 11.5% this year (as of Apr 13, 2017). But things may take a turn for the better in the near term, courtesy of an oil price recovery and a high dividend yield.
Inside the Oil price Rise
The growing concern on Syria boosted oil prices in recent trades. Following a chemical attack on Syria, Russia and Iran have been condemned internationally for supporting to the Syrian president. Oil price reached the highest level in three years on fears of an international strike on Syria.
Though Syria is not a key oil producer, if military action takes place in the region, crude flows across the wider Middle East, which is one of the major oil producers and accounts for one-third of the total world’s oil, could be disrupted. Plus, the possibility of the United States posing new sanctions against Iran is also driving oil price higher (read: Oil Price Jumps on Syria Turmoil: ETFs & Stocks to Trade).
Also, there are chances of an extended output cut deal for the coming 10 or 20 years thanks to the initiative between OPEC member nations and Russia. Plus, at least three ballistic missiles were reportedly fired by Yemen's Houthis, aimed at Saudi cities.
In short, OPEC output cut deal and geopolitical tension have led United States Oil (USO - Free Report) and United States Brent Oil (BNO - Free Report) to add about 9% and 5.8% so far this year (as of Apr 13, 2018). As soon as oil price staged a rally, energy MLPs started to stabilize. Several MLP ETFs were in the green in the last one-week frame.
Lure of Dividends
MLPs are known for their high-yielding nature as these do not pay taxes at the entity level and are thus able to 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.
With trade and tech crash tensions abating, Treasury yields should go up in the coming days. Since most of the MLPs offer treasury-beating yields, investors can tap the segment. Even if they end up witnessing capital losses, a higher yield would protect their portfolio to a large extent (read: Here's Why You Should Steer Clear of Junk Bond ETFs).
Strong Industry Rank
The dual benefits of an oil price recovery 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 6%. This is especially true given that the energy sector is expected to log a solid 60.1% increase in earnings on 16.1% higher revenues, per the Earnings Trends issued on Apr 11.
ETF Options to Play
Below we highlight a few MLP ETFs or ETNs that have been beaten down in the year-to-date frame but offer generous yields and were up on Apr 13.
JPMorgan Alerian MLP Index ETN (AMJ - Free Report) – Down 11.2% YTD; Yield 7.53%
Direxion Zacks MLP High Income Shares (ZMLP - Free Report) – Down 10.2% YTD; Yield 11.17%
ETRACS Alerian MLP Index ETN (AMU - Free Report) – Down 11.5% YTD; Yield 7.59%
First Trust North American Energy Infrastructure Fund (EMLP - Free Report) – Down 9.9% YTD; Yield 4.26%
Global X MLP & Energy Infrastructure ETF (MLPX - Free Report) – Down 12.4% YTD; Yield 4.88%
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