Market Overview

Slick Oil Investors: Consider This MLP ETF Over Oil Funds

Slick Oil Investors: Consider This MLP ETF Over Oil Funds

Oil prices are rebounding this year, and interest rates are still near historic lows. The combination of those two scenarios is renewing investors' enthusiasm for high-yielding master limited partnerships (MLPs) and the corresponding exchange-traded funds.

Getting Slick On Oil

Just look at the Global X MLP ETF (Global X Funds (NYSE: MLPA)). MLPA, which tracks the Solactive MLP Infrastructure Index, sports a trailing 12-month dividend yield of almost 7.7 percent and is up nearly 11 percent year-to-date.

There was a time when many income investors scurried into MLPs and the corresponding ETFs searching for yield amid low U.S. interest rates. Part of their motivation was the belief that because most MLPs are not involved in the exploration and production of oil and natural gas, the asset class was somewhat immune to fluctuations in the prices of those commodities.

As oil prices plunged in 2014 and 2015, that belief proved ill-fated. MLPs and the ETFs that hold them were punished as well, with some seeing their dividend yields soar well into the double digits. While it remains to be seen how long the rally will last for, oil prices are rebounding and MLP ETFs are getting in on that move.

Related Link: Morgan Stanley Lays Out Ardmore Shipping's Bull, Bear Cases And Downgrades To Equal Weight

Data suggest MLPs are yet another asset class where passive management trumps active, at least in the case of the $309.6 million MLPA.

Drilling The Point Home

“Looking back over the last year, however, we see that only one of the 16 mutual funds outperformed MLPA. On average, this group of funds returned -16.88 percent over the last year, with 31.71 percent volatility. By comparison, MLPA returned -8.02 percent, over 850 basis points better, with slightly lower than average volatility of 30.72 percent,” according to Global X research.

Maximum drawdown further underscore MLPA's advantages against actively managed rivals as “MLPA’s maximum drawdown of -38.21 percent ranked it fourth best out of the group, with average mutual fund drawdowns amounting to -43.04 percent, and median drawdowns coming to 40.74 percent,” according to Global X.

MLPA, which turned four years old in April, is home to 21 stocks, all of which are classified as midstream MLPs. The ETF's top 10 holdings combine for about 64 percent of its weight. MLPA's annualized volatility is 25.4 percent, according to issuer data.

“The significant underperformance of actively managed MLP mutual funds and deep drawdowns over the last year, when compared to MLPA, demonstrates that MLP fund managers largely failed to navigate the markets during this difficult period. With the lack of transparency into mutual funds, it’s difficult to pinpoint the reasons for this underperformance, but it is likely due to managers either reaching for yield by overexposing their portfolios to weaker upstream MLPs, or simply mis-timing trades amid the heightened volatility,” added Global X.

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