MLP ETFs Try To Master Momentum

Exchange-traded funds dedicated to master limited partnerships are gradually joining the recent energy sector rally. For example, the popular Global X MLP ETF (NYSE: MLPA) is higher by about 2 percent over the past month.

However, plenty of challenges remain for MLPs, an asset class previously beloved by income-starved investors. For its part, MLPA has become home to nearly $655 million in assets under management in just over five years on the market due in part to its tantalizing yield. MLPA has a trailing 12-month dividend yield of 5.8 percent.

“MLPs suffered during earnings season because a few firms announced disappointing results, but the industry’s earnings reports also provide reasons to be optimistic about longer term growth potential,” said Global X in a recent research piece. “The dispersion of returns between midstream credit and MLP units provides useful information about the market’s interpretation of the stability of the nation’s energy infrastructure and its growth prospects.” 

More Details On MLPA

MLPA follows the Solactive MLP Infrastructure Index, which includes midstream pipeline and energy storage facilities operators. Historically, those types of MLPs have displayed less sensitivity to oil prices, but MLPA is down nearly 10 percent year to date. That performance is indicative of the energy sector's status as the worst-performing sector in the U.S. this year.

Although MLPs usually do not exhibit intimate correlations to oil prices, that does not mean volatility is low with this asset class. MLPA's annualized volatility of 24 percent is well above the 12.5 percent found on the S&P 500.

At the end of the second quarter, the ETF held 23 stocks split among oil storage and transportation names, processing firms and natural gas storage and transportation partnerships.

Credit Has Been Better

Equity investors in MLPs are suffering this year while high-yield debt issued by these firms is performing well.

“MLP units are down -11.45 percent year to date, while high yield midstream credit (high yield bonds issued by MLPs, General Partners of MLPs, or energy infrastructure corporations) is up 5.48 percent,” according to Global X. “High yield midstream credit performance is nearly in-line with the broader high yield debt space and has outperformed the broad high yield energy credit segment.”

On the bright side, data suggest MLP revenue is improving and operating margins are at their best levels in over a year.

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