2013 was pretty volatile for interest-rate sensitive sectors
like Master Limited Partnerships (MLPs) thanks to the Fed
tapering talks which pushed up interest rates substantially.
Despite this sluggish trend, MLPs delivered a decent performance
finishing the year with average gains of about 16%.
With the Fed finally deciding on a soft QE cut-back ($10 billion
per month) from this month, investors are concerned whether MLPs
will able to march ahead in 2014 or not.
The Fed chairman, Ben Bernanke also commented on December 18 that
the bond buying program will be curtailed in phases in 2014 and
may finally end by late 2014, if improvement in the labor market
matches the regulatory body's expectation, (read:
Fed Tapers Bond Purchases: 3 ETFs in Focus on the
). Since then, the downside risk in the MLP sector has increased.
Are MLPs at Risk?
MLPs are publicly traded partnerships generally engaged in the
transportation, storage, production, or mining of minerals and
natural resources. MLPs often operate pipelines or similar energy
infrastructures that make it an interest-rate sensitive sector.
MLPs catch investor eye 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.
Investors looking for higher income levels outside the
traditional bond sources bet on these products (read:
Boost Income and Growth with MLP ETFs
Following the 'Taper' announcement, interest rates started to
show an uptrend which in turn sent the bond yields higher. Though
the latest U.S. job report was shockingly weak and pushed the
bond yields lower instantly, this does not mean that the Fed will
modify its Taper plan only on the basis of one-month data.
In fact, barring this single data, all other economic indicators
are pointing to the rapid pickup in the economy which in turn
indicates further taper in the course of 2014. Also, even after a
downward correction due to the weak job data, yield on 10-year
treasury bonds again inched up to 2.84% as of January 13,
Quite expectedly, in a rising rate environment, MLPs fall out of
favor among yield-seeking investors. Plus, if interest rates
rise, MLPs will have to pay higher for the huge chunk of borrowed
money which may in turn force them to lower their dividend payout
Is there Any Hope?
Probably Yes. First of all, if at all the nominal rate starts
that the rise in inflation-adjusted real rates in 2014 might be
lower than last year.
On the contrary, the Fed's decision on further taper in 2014 will
depend on whether inflation and employment perk up at a desired
pace. That means that a gradual interest rate rise in a modestly
inflationary environment may not prove that bad for the
rate-sensitive sectors (read:
REIT ETFs in Taper Aftermath: Any Hope for Gains
MLPs are relatively safe and less risky options in the broader
energy space. This can be validated by the fact that when oil as
commodity was weak in most of 2013 thanks to the strength in the
greenback, oil producing ETFs especially those in the MLP ETF
space were better placed.
Further, with consistent growth in the energy industry expected
from new developments in the field of unconventional energy,
energy MLP ETFs should benefit considerably over the long term.
After all, rates do not always rise on tightening of monetary
policy. A growing economy and increased business activities may
also push the rates higher.
In such a scenario, investors might want to pay close attention
to the MLP market in the near term. Below, we briefly highlight
the some funds in the space which could be great picks for 2014.
Some top MLP ETFs like
Alerian MLP ETF
JP Morgan Alerian MLP Index ETN
UBS E-TRACS Alerian MLP Infrastructure Index
) lost 0.46%, 0.31%, 0.36% in the first 10 days of January while
SPDR S&P 500
) added 0.17% during the same time frame (see more ETFs in the
). One fund
ETRACS Alerian MLP Index ETN
) however gained 0.11% in the short period.
The return figures confirm the fact that MLPs were not severely
beaten down post taper announcement. The mild losses were in line
with the broader market and may be were reflections of pent-up
profit booking activity.
AMLP is an extremely popular choice in the space with more than
$7 billion in assets, but funds like AMJ ($5.7 billion) and MLPI
($1.6 billion) also attract sufficient investments. Among these,
AMU is a slightly overlooked option with around $200 million of
assets. Investors should also note that all four funds currently
have a dividend yield of more than 3% (more than the 10-year
Treasury bond yield) with AMLP boasting as high as 6.09%.
As the market has essentially priced in some cuts to the QE
program this year, we do not expect much disruption in the
interest rate world if the Fed pairs down its stimulus gradually.
Though some psychology-induced sell-offs will be there in MLPs
with each Fed announcement, the inherent fundamentals of the
sector should remain strong.
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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
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