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.
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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.
Celebrating Oil's Rebound
For example, the Global X MLP ETF (Global X Funds (MLPA)) is up 12.6 percent over the past three months. The $240.6 million MLPA holds midstream pipelines and storage facilities, including Enterprise Products Partners L.P. (EPD), Magellan Midstream Partners, L.P. (MMP) and Plains All American Pipeline, L.P. (PAA).
After being bludgeoned, some MLPs got so inexpensive that some big-name professional investors just could not resist nibbling at the asset class.
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In short, midstream MLPs got cheaper, while adjusted EBITDA and distributions grew. For value investors, these results are quite attractive and perhaps what led to value-hunting institutions like Berkshire Hathaway, Jana Partners, and Appaloosa Management all initiating positions in midstream infrastructure companies and MLPs in their latest 13f filings, according to a Global X note.
While investors clearly like MLP ETFs, many are not aware until it is too late of a nasty surprise with some MLP funds. That is these ETFs are structured as C-corporations, meaning issuers can ding investors with high fees well in excess of the ETF's stated expense ratio.
Delving Deeper Into MLPA
For its part, MLPA has a management fee of just 0.45 percent, one of the lowest among MLP ETFs, but its total expenses flirt with four percent. On the other hand, MLPA's yield of 9.2 percent might just be too tempting for some yield hunters to ignore.
Still, MLPs look like a better for most investors than oil futures and comparable investments.
While rising correlations are a source of frustration for many investors who invested in MLPs as a diversifier to other energy investments, it can also present new opportunities. For example, those looking for ways to bet on oil prices could either buy oil futures, which are currently in contango and have a 14 percent annual roll yield, or invest in MLPs yielding 9.2 percent. All else equal, in a flat oil market where neither the price of oil futures nor MLPs move, the MLPs would outperform the futures by 23 percent, added Global X.
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