Kinder Morgan Is A Drag On This ETF

Shares of Kinder Morgan Inc. KMI, one of the largest U.S. energy companies, are down nearly 46 percent over the past month and that spells bad news for the approximately 70 exchange traded funds that hold stakes in the Houston-based pipeline giant.

While the Energy Select Sector SPDR XLE, the largest energy ETF by assets, and rival cap-weighted energy ETFs previously featured Kinder Morgan among their top 10 holdings, the stock's rapidly eroding market value has sent the stock packing from the top 10 lineups of many standard equity-based energy ETFs.

That has left the First Trust North American Energy Infrastructure Fund EMLP as the ETF suffering the most at Kinder Morgan's hand. Since the start of this month, Kinder Morgan has contended with rising speculation that one of the major ratings agencies will downgrade its credit rating to junk status and the subsequent speculation that its dividend, one of the primary reasons investors buy the stock, is danger of being cut.

According to a Bloomberg story out Friday, Kinder Morgan's "will be reviewing the dividend policy and financing plans in the coming days," Kinder Morgan said in a statement Friday. The company said it expects to generate $5 billion in distributable cash flow next year that would be sufficient to support a dividend increase. “Alternatively, this cash flow can be used to fund some or all of KMI’s equity needs for 2016.” 

Kinder Morgan fell 12.7 percent last Friday, triggering a decline of 2.2 percent in EMLP on volume that was well above double the ETF's three-month trailing average. EMLP has tumbled 13.7 percent over the past month, the result of Kinder Morgan currently being its second-largest holding at a weight of 6.7 percent. Only Enbridge Energy Management LLC EEQ occupies a bigger slice of EMLP's weight. 

If there is good news, for EMLP that is, it is that the ETF is actively managed. That means the fund's management team does not have to keep holding Kinder Morgan, but it must be noted no announcement has been made about EMLP parting with Kinder Morgan. Home to nearly $873 million in assets under management, EMLP is one of the largest actively managed ETFs trading in the U.S.

EMLP invests in MLPs “MLP affiliates, Canadian income trusts and their successor companies, pipeline companies, utilities, and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries,” according to First Trust. 

EMLP, which has a 12-month distribution yield of 3.91 percent, has been around for three and a half years, earning a five-star Morningstar rating along the way.