3 Reasons To Invest In MLP ETFs

Master limited partnerships or MLPs have been under pressure this year. Alerian MLP ETF (F:AMLP) is down 17% this year (as of Nov 10, 2017). But things may take a turn for the better in the near term courtesy of an oil price recovery and a high dividend yield.

Let’s delve a little deeper into what could propel the space this year.

Jump in Oil Prices

At the end of October, Brent touched its highest level since July 2015 and U.S. crude reached a level not seen since February on a likely extension of the OPEC output cut. Markets are now hoping that output reduction could be protracted beyond March. As a result, United States Brent Oil (AX:BNO) and United States Oil (NYSE:USO) USO gained about 14.9% and 10.1% in the last one month (as of Nov 10, 2017), respectively (read: Top ETF Stories of October 2017).

As soon as oil price staged a rally, energy MLPs started to stabilize. Several MLP ETFs were in the green in the last one-week and one-month frame (read: Oil Price Scales 2-Yr High: 5 Best Energy ETFs & Stocks).

Lure of Dividends

MLPs are known for their high-yielding nature 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. While most traditional income asset classes produced miniscule yields, MLPs lured investors with their higher payouts.

Yes, MLPs underperform in a rising rate environment as these have to depend on the debt market to finance their operations or fresh projects. Naturally, higher rates amid the Fed tightening cycle would cut back their profitability. But investors should note that many MLPs use a fixed rate debt for their borrowings.

Moreover, treasury yields spiked lately on Fed rate hike speculation and chances of tax cuts in the medium term. As of Nov 10, 2017, the yield on 10-year U.S. Treasury notes was 2.40%. Since most of the MLPs offer treasury-beating yields, investors can tap the segment. Even if they end up witnessing capital losses, a higher yield would protect their portfolio to a large extent (read: December Rate Hike May Boost These ETFs).

Strong Industry Rank

The dual benefits of an oil price recovery and a high-yielding nature amid Fed policy tightening might favor MLP ETF investing at the current level. Investors should note that the Zacks Industry Rank of the energy and pipeline MLPs is in the top 27%.

ETF Choices

Below we highlight a few MLP ETFs that were in the green in the last five trading sessions and have solid dividend yields (as of Nov 10).

Morgan Stanley (NYSE:MS) Cushing MLP High Income Index ETN MLPY -- Yields 8.84% annually

iPath S&P MLP ETN IMLP – Yields 6.87% annually

Global X MLP & Energy Infrastructure ETF MLPX -- Yields 6.06% annually

UBS ETRACS Alerian Natural Gas MLP ETN (DE:MLPG) – Yields 6.01% annually

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