Market Overview

Checking In On An MLP ETF

Checking In On An MLP ETF

Although speculation that interest rates will soon rise is increasing, rate-sensitive master limited partnerships (MLPs) have recently been performing well. Just look at the Global X MLP ETF (Global X Funds (NYSE: MLPA)), which has gained more than 4 percent over the past month.

MLPs, ETFs And Misunderstandings

There was a time when many income investors scurried into master limited partnerships (MLPs) and the corresponding exchange-traded funds 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.

Related Link: A Conservative Approach To Bond ETFs

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.

However, low yields on many fixed income investments are prompting investors to revisit ETFs like MLPA, which yields over 7 percent. Valuations are on the rise, though.

Putting It All Into Perspective

“The price to adjusted EBITDA ratio, which seeks to provide more color on an MLP’s prices relative to their earnings, has risen along with the recovery in prices over the past year. Since last September, the ratio has increased approximately 14.7 percent, which closely mirrors the 14.5 percent appreciation of the Solactive MLP Infrastructure Index, demonstrating the stability of midstream MLP earnings this year, despite low energy prices,” according to Global X research.

The $331.7 million primarily holds midstream pipelines and storage facilities, which are historically less sensitive to swings in energy prices. MLPA, which is 4.5 years old, holds 21 stocks and follows the Solactive MLP Infrastructure Index. MLPA has a beta of 0.96 against the S&P 500, according to issuer data.

Still, investors should be aware of the impact falling crude prices can have on MLPs. Predictably, the result is not positive.

“Since the period of heightened volatility at the beginning of 2016, volatility has recently stabilized at just above 20 percent. Correlations with crude and energy stocks increased moderately over the last three months as oil fell below $45/barrel. We have found that when oil falls below $45/barrel, correlations between MLPs and crude rise significantly,” added Global X.

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