DWA MLP Select Index: Celebrating 5 Years of Outperformance
On May 1, 2020, the DWA MLP Select Index (DWAMLP) celebrated its fifth anniversary. While the state of the energy market has been in constant flux since the launch of the DWAMLP, the methodology and the robust process employed by the index has remained constant, and it has provided a dynamic way of tracking and accessing this important investment space. Additionally, the DWAMLP has managed to outperform, on a total return basis, its benchmarks as well as a crude oil since it launched.
What is an MLP?
Master Limited Partnerships (MLPs) are a good example of unique investment vehicles that can offer market participants certain benefits traditional products, such as equities and bonds, may not always provide. To begin, let’s start by giving a brief background on MLPs and how they are structured. By definition, a master limited partnership (MLP) is a business organization that exists in the form of a publicly traded limited partnership. There are two classes of partners within an MLP: limited partners and general partners. Limited partners purchase units in the MLP, which provide capital for the day-to-day operations. This also allows them to receive periodic cash distributions that are typically paid out every quarter. General partners are responsible for managing the day-today operations and are compensated based on the performance of the business. Gaining access to an MLP is fairly easy as they can be purchased through an exchange or over the counter like most common stocks. They are most often organized by energy firms that are involved in the oil and gas industry that deal with pipelines and storage.
One of the major advantages that MLPs provide to investors is the periodic income stream due to the quarterly cash distribution and high dividend yields. Because of their structure, MLPs also provide investors with nice tax advantages. For example, MLPs are not taxed at the corporate level. Instead, each unitholder is taxed on his or her portion of MLP earnings, which helps avoid the double taxation most corporations must pay. One of the main risks involved includes declining energy prices, which eventually could force an MLP to cut its dividend. One way to avoid this company-specific risk is by investing in an ETF or ETN comprised of several MLPs to diversify holdings beyond one security, such as the DWA MLP Select Index.
DWA MLP Select Index (DWAMLP)
The DWA MLP Select Index (DWAMLP) launched on May 1, 2015, and follows the Dorsey Wright Relative Strengthbased methodology. It is rebalanced monthly and will continue to be allocated towards the strongest performing members of the universe.