Master limited partnership and energy infrastructure exchange traded funds were trading near all-time highs as investors look for investment alternatives in a shaky market and capitalize on the shale oil expansion.
For instance, the Global X MLP & Energy Infrastructure ETF (MLPX) was hovering around $18.1 per share before dipping 0.7% Tuesday. MLPX has gained 10.7% year-to-date.
According to a recent Fitch Ratings report, Non-Traditional MLP Assets (Changing Mix, Changing Risk), non-traditional MLP Investments continue to support hydraulic fracturing. MLPs can also serve as a stable investment due to their low volatility and revenue source.
“In some cases, these operations exhibit favorable characteristics of traditional pipelines such as longer-term contractually supported revenues, strong counterparties, and low volatility,” according to a press release.
While MLPs are associated with the energy sector, they have a low correlation to energy prices, along with the broader equities markets, as the assets act like a toll-road in the nation’s energy infrastructure. Consequently, these companies will generate a steady revenue stream as oil continues to flow.
Moreover, MLPs have a historically low correlation with the S&P 500, which helps diversify a portfolio.
Fitch expects MLPs will play a large role in the U.S. energy sector as shale operations expand. [Increased Investment Activity Could Energize Energy ETFs]
“Traditional assets will continue to dominate the MLP space as the enormous investment in large-scale pipeline/midstream infrastructure projects to serve the shale basins has several years to play out,” Fitch said.
Unlike popular MLP ETPs, like the Alerian MP ETF (AMLP) and JPMorgan Alerian MLP Index ETN (AMJ) , MLPX limits direct exposure to MLPs to 25% of the portfolio and includes other energy infrastructure stocks. MLPX is also one of the cheapest MLP-related funds, with a 0.45% expense ratio. AMLP and AMJ both have 0.85% expense ratios.
Hybrid MLP ETFs include exposure to master limited partnerships, MLP affiliates and other energy infrastructure stocks so that they won’t have to be structured as a C-Corporation and incur taxes whenever it rebalances holdings. MLPX and the Alerian Energy Infrastructure ETF (ENFR) are two passive, index-based options, whereas the First Trust North American Energy Infrastructure Fund (EMLP) is actively managed. ENFR has a 0.65% expense ratio and EMLP has a 0.95% expense ratio. [How MLP ETF Structures Affect Yields and Returns]
Global X MLP & Energy Infrastructure ETF
For more information on master limited partnerships, visit our MLPs category.
- MLP Investments
- energy infrastructure
- Fitch Ratings