MLP ETFs: A Lot Less Bad Than Oil

Even with the benefit of a recent bounce, the United States Oil Fund LP (ETF) USO, which tracks West Texas Intermediate futures, is lower 12.3 percent year-to-date. That underscores the point that oil is one of this year's worst-performing commodities, but not all energy-related investments are performing as poorly as oil itself.

The Difference: MLPs, Exchange Funds Tracking MPLs And Holdings

For example, some exchange funds tracking master limited partnerships (MLPs) are delivering performances that are significantly less bad than oil itself. The Global X MLP & Energy Infrastructure ETF MLPX is down 4.1 percent this year, which is obviously nothing to brag about but is also obviously better than oil. The Global X MLP ETF MLPA is down just a tenth of a percent.

“Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, declined 1.20 percent last month partly due to lower oil prices. The index has gained 12.34 percent over the last one-year period,” said Global X in a recent note.

Case In Point

Oil's bear market in 2014 and 2015 was an exception, but MLPs often prove resilient when oil prices slide because these companies merely transport the commodity, not produce it.

The Solactive MLP Infrastructure Index is the benchmark tracked by the $593 million MLPA. The ETF holds 24 midstream pipeline and storage facilities MLPs. MLPA's dividend yield is nearly 7 percent, highlighting many income investors remain enthusiastic about MLPs.

“The current yield on MLPs stands at 6.69 percent. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.63 percent), Preferreds (5.38 percent), Emerging Market Bonds (5.35 percent), and REITs (3.97 percent). MLP yield spreads versus 10-year Treasuries currently stand at 4.40 percent, higher than the long-term average of 3.64 percent,” according to Global X.

MLPA is a top heavy fund as its top 10 holdings combine for about two-thirds of its weight and its top 10 holdings combine for over 23 percent. Valuations are falling a bit on MLPs as well.

“The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, decreased in April compared to March as MLP unit prices fell,” said Global X. “Since April 2016, the EV-to-EBITDA ratio has increased approximately 5.1 percent, as oil prices, and subsequently MLP equities, 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.”