High-Yielding MLP ETFs Pressured as Rates Climb

ETFtrends.com

Exchange traded products tracking master limited partnerships such as Alerian MLP ETF (AMLP) and JPMorgan Alerian MLP Index ETN (AMJ) have dropped below their 50-day moving averages for the first time this year as interest rates tick higher.

MLP ETFs have been gathering assets in recent years due to their strong performance, diversification properties and attractive yields in a low-rate environment for bonds. AMLP has seen inflows of nearly $1.4 billion so far this year after amassing $2.6 billion last year, according to IndexUniverse data. The ETF currently holds $6.2 billion in total net assets.

Yet MLP products have come under a bit of pressure the past two weeks as Treasury yields rise. AMJ was down more than 2% at one point on Wednesday.

MLPs are companies that focus on the processing, storage and transportation of oil and natural gas. They pay out most of their net income to investors.

“There are several reasons for investors in MLPs to be concerned if interest rates rise,” writes Justin Carley at the Motley Fool.

He said MLPs would not be as attractive relative to U.S. Treasuries if rates continue to rise. “Secondly, MLPs are highly leveraged and higher interest rates would hurt the bottom line more than other industries,” Carley added.

Next page: MLPs’ cost of capital and Gundlach’s warning on higher rates