While the U.S. stock market seemed weak thanks to the slew of soft data - be it for retail, unemployment or manufacturing - so far this year, some corners of the market like Master Limited Partnerships (MLPs) survived this doldrums pretty well.
Falling interest rates noticed in the beginning of 2014 worked in favor of the MLPs, and consistent growth in the energy industry with developments in the field of unconventional energy played a major role in the sector's outperformance.
Continued sluggishness in retail and job data and the start of the QE taper era unnerved many investors and urged them toward the risk-off trade which in turn pushed the interest rates down. As of late, the 10-year Treasury yield slipped to around 2.73% from the 3.00% we witnessed at the start the year (read: 3 Sector ETFs Braving the Market Slump ).
MLP exchange-traded products - one of the beneficiaries of this situation - hauled in a large sum of assets this year, and many are expecting solid returns in the coming months too.
Over the last one month, Alerian MLP ETF ( AMLP ), JP Morgan Alerian MLP Index ETN ( AMJ ), UBS E-TRACS Alerian MLP Infrastructure Index ( MLPI ), ETRACS Alerian MLP Index ETN ( AMU ) and iPath S&P MLP ETN ( IMLP ) have seen solid trading, with low levels of volatility too.
High Yield Vehicles
MLP products are generally high yielding compared to other equity focused investments. This is because MLPs do not pay taxes at the entity level and are thus able to pay out most of their income in the form of dividends. Thus, in a low-interest rate environment, yield-seeking investors tend to invest in MLPs.
Notably, the present yield of the AMLP, AMU, AMJ, MLPI and IMLP are 7.63%, 4.93%, 4.66%, 4.54% and 4.49% respectively - all being quite higher than the present 10-year Treasury bond yield. There are also MLP ETPs which are yielding around 9%, further underscoring the income-properties of these investments (read: MLP ETFs: Still Good for Income Investors?) .
In such a scenario, it is prudent to note the MLP products that endured market volatility more efficiently and have seen decent gains this year.
iPath S&P MLP ETN ( IMLP )
Entering the market in January 2013, IMLP looks to track the S&P 500 index. There are 56 components in the energy space. Over the past one month, IMLP returned about 3.4%. The fund charges 0.80% in expenses per year.
UBS E-TRACS Alerian MLP Infrastructure Index(MLPI)
Launched in March 2010, MLPI is designed to deliver the returns of the infrastructure securities of the MLP world. With total assets of about $1.69 billion, MLPI is one of the largest and popular ETFs in the MLP space. MLPI charges 85 basis points in fees and gained 3.3% over the last month.
UBS ETRACS Alerian MLP Index ETN (AMU)
Making a debut in July 2012, AMU - which tracks the Alerian MLP Index - has so far garnered about $226.3 million. The product charges investors an expense ratio of 80 bps per year. Its yield as of February 13, 2014 was 4.93%. AMU has returned about 3.1% over the past one month (read: Direxion Rolls Out High Income MLP ETF ).
In a nutshell, MLP ETPs turned out to be an excellent unison of capital appreciation and dividend distribution. Investors should note that the extensively followed Alerian MLP Index has generated an average annual return of about 15% over the last 10 years along with distribution growth of almost 8% a year, as per the Wall Street Journal (read: Boost Income and Growth with MLP ETFs ).
Some market experts believe that "MLP fund yields will rise by about 5% a year on average over the next decade". Some are also "forecasting annual total returns for a typical MLP fund of around 10% in that period". If these forecasts hold true, now could definitely be the time to look at MLP ETFs, and any of the aforementioned products make for interesting picks in this environment.
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JPM-ALERN MLP (AMJ): ETF Research Reports
ALERIAN-MLP (AMLP): ETF Research Reports
E-TRC ALRN MLP (AMU): ETF Research Reports
IPATH-SP MLP (IMLP): ETF Research Reports
E-TRC UBS ALERN (MLPI): ETF Research Reports
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