Oil is one of this year's worst-performing commodities, but master limited partnerships have been somewhat sturdy in the face of falling crude prices. For example, the Global X MLP ETF (MLPA) is lower by just 0.35 percent compared to a year-to-date loss of 5 percent for the United States Oil Fund (USO).
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What's Up With MLPs?
There was a time when many income investors scurried into 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.
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 close to 7 percent and yield remains one of the primary catalysts luring investors to MLPs.
The current yield on MLPs stands at 6.85 percent MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.84 percent), Emerging Market Bonds (5.52 percent), Preferreds (5.44 percent) and REITs (4.28 percent), said Global X in a recent note. MLP yield spreads versus 10-year
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Treasuries currently stand at 4.45 percent, higher than the long-term average of 3.63 percent.
The $518.6 million MLPA tracks the Solactive MLP Infrastructure Index. The ETF invests in midstream pipelines and storage facilities that have less sensitivity to energy prices, according to Global X.
MLPA holds 22 stocks and follows the Solactive MLP Infrastructure Index. MLPA has a beta of 0.96 against the S&P 500, according to issuer data.
In its six years on the market, MLPA has outpaced actively managed competitors, but investors should dig deeper and examine fees and the broader MLP space's valuations.
The Enterprise Value to EBITDA ratio, which seeks to provide more color on the valuations of MLPs, increased in Q1 2017 compared to Q4 2016 as MLP unit prices appreciated, said Global X. Since Q1 2016, the EV-to-EBITDA ratio has increased approximately 6.6 percent, as oil prices recovered from previous lows. In addition, from 2015 to 2016, MLP Debt to Adjusted EBITDA ratios fell -6.9 percent from 4.90x to 4.56x, as MLPs continue to make concerted efforts reduce leverage ratios.
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