Credit: Shutterstock photoCinthia Murphy, Managing Editor of ETF.com
Master limited partnerships (MLPs) and the ETFs built around them have been in the limelight following the Federal Energy Regulatory Commission’s (FERC) recent ruling limiting how much some MLPs may charge their customers.
The MLP segment, generally, was already having a tough time finding much upside, and the new regulation helped push the segment even closer to its 2016 lows in recent days.
In the ETF space, the Alerian MLP ETF (AMLP)—the biggest MLP ETF, with $8.3 billion in assets under management—is down almost 12% year-to-date, posting nearly 4x the losses of the S&P 500.
In an interview with ETF.com, Jeremy Held, senior vice president and director of research at ALPS Advisors, says the FERC ruling clearly stirred up concern among investors, but its impact longer-term may be negligible. In his words, “there’s a crisis of confidence in the MLP sector” that goes beyond the latest ruling.
“Uncertainty is the enemy of premium valuations in every asset class. A number of factors have created uncertainty over the last few years in the MLP sector,” Held said in the interview. “Between the U.S. becoming the swing producer in crude oil, MLPs seeking to improve corporate governance, adopting a self-funding model, growing at a slower rate, and the FERC ruling, there continues to be a lot of uncertainty in the space. We’re potentially entering a new repricing scenario.”
In the end, Held argues that the recent price drop in the MLP segment could prove to be a good buying opportunity going forward.
“MLPs continue to provide a vital component of energy infrastructure, and many of the reasons to own MLPs haven’t changed as dramatically as the sentiment has,” he said.
A Puzzlingly Popular MLP ETF
There are many MLP ETFs on the market today, AMLP being the segment leader. But among the many strategies, there’s also one that stands out due to its surprising popularity.
The InfraCap MLP ETF (AMZA) has gathered more than $475 million in fresh net assets in the past year, making it a $540 million fund today.
Surprising here is the fact that investors have been piling into the fund even as it delivered underperformance relative to the segment—AMZA has lost 20.29% in 12 months, below the average for MLP ETFs. AMZA is also expensive, with a price tag that nears 2%, the highest in the space.
What’s so appealing about this fund is its yield. Currently, AMZA offers a 33.99% dividend yield, the third-highest of all ETFs.
The secret lies in three key factors. First, it’s in the way the fund is structured—only one of six MLP ETPs to be structured as a C-corp. It’s also in the way it classifies its distributions as return of capital rather than income. And finally, it’s a result of the way the portfolio is built, relying on shorting and options contracts to boost current income.
AMZA goes to show that MLP ETFs aren’t all created equal, and that impressive yield doesn’t come cheap—AMZA has the 27th-highest price tag among all 2,000-plus U.S.-listed ETFs.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
