Master limited partnerships, which typically run
toll-road-type businesses transporting, storing and processing
oil and gas, have exploded this year.
They could be this year's big catch-up play after lagging the
market last year. And if history repeats, they offer a compelling
source of dividend income in a rising interest rate environment,
JPMorgan Alerian MLP Index ETN (
) popped 18.7% year to date vs. 9.7% for SPDR S&P 500 (
).Energy Select Sector SPDR (
), tracking the oil and gas producers in the S&P 500, added
9.0% year to date.
ALPS Alerian MLP ETF (
), the most widely traded MLP ETF, rose 10.5% year to date. In
2012, AMJ climbed nearly 4%, while SPY surged 16% and AMLP gained
AMJ and AMLP both track the same underlying indexes. Their
returns differ because of their fund structures. AMJ is an
exchange traded note, which is basically a company IOU designed
to track the underlying index.
Investors do not actually own the underlying stocks and must
rely on the issuer to make good on its debt obligations. Changes
in the issuer's credit ratings could affect the ETN's value. AMJ
takes 0.85% of assets as an annual fee. It has a 12-month yield
AMLP is structured as a regular corporation rather than a
mutual fund like most
. It has to pay federal income taxes, which get passed on to AMLP
investors as a "deferred income tax expense."
That now comes to 4.01%. So on top of the 0.85% annual
management fee, AMLP's total expense ratio amounts to 4.86%,
making it the most expensive ETF by far. Its 12-month yield is
The largest names in the Alerian MLP Index includeEnterprise
Products Partners (
),Kinder Morgan Energy Partners (KMP),Plains All American
Pipeline (PAA),Energy Transfer Partners (ETP) andEnergy Transfer
MLPs could return as much as 25% this year, according to
Credit Suisse analysts. "MLPs remain well positioned to benefit
from what will likely be a sustained increase in North American
crude oil, natural gas and NGL (natural gas liquids) production
over the next decade," Credit Suisse analysts wrote in a
"With much of this incremental production coming from
unconventional sources, the demand for energy infrastructure,
specifically midstream infrastructure such as pipelines,
processing facilities and storage, should trump the potentially
negative impact of higher interest rates," the analysts
They believe interest rates will rise because the Federal
Reserve will eventually have to curb its quantitative easing
program, sending 10-year bond yields to normal historical levels
in the 2% to 3% range.
Yields on 10-year government bonds started the year at 1.86%,
climbed to 2.07% in mid-March and have since fallen to 1.76%.
Major dividend-paying sectors outperformed the market under that
rare condition in the past.
From June 2004 to June 2007, when the Fed's target rate
climbed from 1.25% to 5.25%, real estate investment trusts,
utilities and MLPs all outpaced the S&P 500. In the
three-year period, utilities returned a compounded 24%, REITs 20%
and MLPs 19% vs. 11% for the S&P 500, Credit Suisse wrote.
High-yield bonds returned 9% while investment grade bonds added
"The key MLP advantage over bonds is the potential for
distribution increases and the equity component, which gives the
investor a degree of inflation protection," Credit Suisse