MLP ETF

Investors who are on the outlook for a fairly stable and comparatively high yield asset, that also offers a fixed income, may wish to take a closer look at Master Limited Partnership exchange-traded funds or MLP ETFs as they are called.

Even though MLP ETFs are a relatively recent entry in the ETF market, they have stirred up quite a bit of interest mainly because MLPs offer a functional platform to invest in the highly potential energy industry. Further, as an added benefit, MLPs provide investment appreciation, as well as payout of regular dividend.

Brian Sylvestor of Investor Ideas writes that Michael Blum, a Senior Energy Analyst (MLP) at Wells Fargo, is a strong believer of the fact that even today MLP ETFs have a lot of potential, since they are based on sound business fundamentals, attractive yields and distribution growth.

Four main MLPs offered in the market are:

Alerian MLP ETF (AMLP), which was one of the first funds launched as MLP ETF. It is mainly diversified over three prime MLPs: natural gas pipelines, petroleum transportation, in addition to gathering and processing.

Credit Suisse Cushing 30 MLP Index (MLPN), which owns thirty companies engaged in energy infrastructure. It is an equally weighted fund, rather than the common cap-weighting route.

UBS E-TRACS Alerian Natural Gas MLP ETN (MLPG) was launched in the month of March in 2010. Top ten components of this fund range between an average of 9.7% of its total portfolio (for Enterprise Products Partners) and on the downside to 4.4% (for MarkWest Energy Partners).

JPMorgan Alerian MLP Index ETN (AMJ) currently yields about 5.04%. Its top 2 constituents alone account for over 25% of this fund. However, investors more concerned with concentration may prefer equally-weighted funds or funds that have their holdings more spread out.

Exploration and Production (E&P) MLP ETFs are chiefly concerned with exploration and production of natural gas and oil, whereas Gather and Processing (G&P) MLP ETFs are basically concerned with natural gas liquids (NGLs) after extraction. G&P MLP ETFs derive their main benefits from consistently rising prices for oil and comparatively low prices for natural gas.

About 80% distributions, receivable from MLP ETFs, are tax deferrable up to the time when the asset may be sold. Further, MLPs are treated as equity, which implies a distinct upside in their price. Furthermore, MLP distributions are subject to change. Blum forecasts foresee an expected average growth of 5% in distribution for MLP sector in the coming years.

MLPs are somewhat sensitive to spontaneous changes in interest rates. Hence, unexpected spikes in the interest rates are likely to make MLPs underperform. Investors are advised to keep a watch out for any possible signs of action by the Federal Reserve in this regard. Moreover, MLPs are correlated with commodity prices, especially showing a much higher correlation to rising prices of crude oil. This certainly is a distinctly advantageous situation in the existing economy.

Jim Fink, who writes for the Investing Daily, reports that bursts over shot-terms do not affect MLPs to any great extent as their operations are mainly based on the volume of natural gas or oil that is actually shipped, which provides the investors with stable and predictable cash flows.