ET - AMLP: Everyone Who Owns This Energy ETF Needs To Consider An Alternative

2023-06-09 08:36:48 ET

Summary

• Alerian MLP is an ETF that tracks midstream MLPs and offers a high, consistent yield of about 7.9%.
• AMLP is very similar to another MLP ETF, MLPA, but charges twice as much for management.
• Due to the higher management fees and lack of unique offerings, I rate AMLP a Sell.

The Alerian MLP (AMLP) is an ETF that tracks the Alerian MLP Infrastructure Index . It offers exposure to US MLPs that get most of their cash flow from midstream activities. Because of the nature of midstream MLPs, AMLP has slow growth, but a high and consistent yield of about 7.9%. I've recently covered other MLP ETFs, and I was asked by a few people for my opinion of AMLP. AMLP doesn't offer anything unique that isn't found in other MLP ETFs such as Global X MLP ETF (MLPA), but it charges an expense ratio that is about twice as high as MLPA's. AMLP is extremely similar to MLPA. There is no justification to be paying more for AMLP. Because of this, I rate AMLP a Sell.

AMLP's holdings

AMLP currently holds 16 midstream MLPs weighted by market cap.

AMLP's top 10 holdings make up about 97% of the ETF. The top six MLPs ( MMP , PAA , EPD , ET , MLPX , and WES ) account for almost 77% of its AUM, making this ETF heavily skewed to the top. These holdings aren't too different compared to AMLP's peer, MLPA. Probably the most important similarity between the two ETFs is how close their holdings are to each other. They have an 85% overlap.

This overlap causes the two ETFs to have very similar performance.

AMLP's performance vs MLPA's

Over the last 10 years, these two ETFs have performed incredibly similarly. Currently, AMLP is slightly outperforming by less than one percent, but the two ETFs take turns slightly underperforming and outperforming each other.

The correlation chart between these two ETFs is a great testimony to how nearly identical they perform.

The correlation of the 6-month total returns of these ETFs is almost entirely above 0.95. Most of the time it looks to be very close to 1 (perfect correlation), and is currently at about 0.99. Because their holdings aren't perfectly identical and they don't hold the same number of MLPs, they have some fluctuation in correlation, but as the chart shows, they are still extremely correlated.

Yield comparison

The best thing about MLP ETFs is their high dividend yield. It should come as no surprise that AMLP and MLPA have similar yields.

As the image above shows, they have similar yields, with AMLP currently being slightly higher, but MLPA having a slightly higher 4-year average.

The following chart shows their yields since 2021.

The two also take turns giving higher yields. This is likely because they do have slightly different holdings, and these different holdings can have natural fluctuations in yields.

If the decline in dividend yields from January 2021 to today (from about 12.5% to 7.5%) concerns you, keep in mind that in 2021, companies were still recovering from COVID-19, and had lower stock prices, causing the yield percent to be higher. These two ETFs are able to have such high, consistent, and relatively stable yields (excluding the first half of 2021 where COVID-19 still affected yield percentage) because of the nature of midstream MLPs . These MLPs are in an industry that is slow growing and less volatile compared to the rest of the energy sector, leading to a more stable stock price. Also, midstream companies get most of their income from long-term contracts . This provides these companies with stable cash flow, and therefore stable dividends. This is why I think now is a perfect time for an MLP ETF.

The future outlook for MLPs

I fully expect the economy to go into a recession in the next 12-18 months. At this point, I think the possibility of a soft landing, or even just a mild recession, isn't feasible. The federal funds effective rate is less than a quarter point below what it was before the 2008 financial crisis, and a little over a percent away from the high before the dot-com bubble, but the economy is still booming. The CPI is still coming in higher than expected , payroll increased almost double what was expected in May, and SPY is up 12.5% YTD.

All this may sound good, but the Fed needs to slow the economy down to get inflation under control. The measures that the Fed has taken so far haven't worked well enough, which will cause them to take an even more aggressive approach. Although it's likely that the feds won't raise rates in June, they have hinted that rate increases will continue later in 2023 . In my opinion, this will inevitably end in a recession.

It would be nice to wait out all this economic turmoil with your money in an asset that has low volatility and a nice yield. This is a great opportunity to buy an MLP ETF that provides both. The question is which one to purchase.

AMLP vs MLPA

If now is a great time for MLP ETFs, and AMLP and MLPA are so similar, can't an investor just choose either one and expect the same result? That would make sense except AMLP has one flaw that makes it a far worse alternative. AMLP has an expense ratio of also double MLPA's.

Both funds have been around for about the same amount of time, with MLPA being about one and a half years younger. AMLP also has about 5 billion more dollars of AUM than MLPA. I see no justification for AMLP to charge 0.4% more. As I've discussed, these two ETFs are nearly identical: similar holdings, similar returns, and similar yields, but AMLP charges almost double the expenses. If an individual is investing in small amounts of money, this may not be a big deal. But for long-term, high-net-worth investors, this expense ratio can really start to cut into gains. As the chart below shows, $10,000 invested in both would yield different results, with AMLP underperforming by about two and a half percent. Most of this difference is due to AMLP's higher expense ratio.

Conclusion

AMLP offers exposure to the midstream MLP industry. It has a high yield and low volatility compared to the rest of the energy sector. Although AMLP offers these great traits, it has a higher expense ratio than its peer MLPA, which is almost perfectly correlated with AMLP. I rate AMLP a Sell because it has a cheaper peer that is nearly identical.

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