LNG - MLPX: High Yield Potential Amid Market Volatility

2023-10-26 22:02:50 ET

Summary

• Global X MLP & Energy Infrastructure ETF focuses on midstream MLPs and energy infrastructure companies, providing exposure to the transportation, storage, and processing of energy resources.
• MLPX has a relatively concentrated portfolio with 27 holdings, including ONEOK, Cheniere Energy, Williams Companies, and Enbridge.
• MLPX has lagged behind the broader market in the past year but outperformed other energy sector ETFs such as XLE and EMLP. Its performance is heavily dependent on future oil prices.

Overview

Global X MLP & Energy Infrastructure ETF ( MLPX ) primarily focuses on midstream master limited partnerships (MLPs) and energy infrastructure corporations. Midstream entities are often involved in the transportation, storage, and processing of energy resources, including oil, natural gas, and refined products. MLPX contains a mix of MLPs and energy infrastructure companies, allowing it to avoid certain tax complications associated with pure MLP ETFs.

MLPX follows an index consisting of MLPs and businesses involved in energy infrastructure. The ETF was launched by Mirae Asset Global Investments Co., Ltd. and operates as an open-ended investment fund.

Contrasting many existing MLP ETPs that use the C-corporation structure, MLPX adheres to the traditional 1940 Act fund regulations . This structure avoids certain pitfalls but consequently provides a tempered exposure to MLPs. The fund aims to include a minimum of 20 U.S.-listed middle-tier energy infrastructure MLPs and corporations in its portfolio. To remain RIC-compliant, MLPX can only dedicate up to 24% of its assets to MLPs during its quarterly adjustments, allocating the remainder to infrastructure companies, which are then weighted based on their market capitalization. The ETF has an expense ratio of 0.45%, representing the annual costs when investing in the ETF. It currently holds assets under management totaling roughly $950 million.

Holdings

MLPX ETF is relatively concentrated with a total of 27 holdings. The ETF is capped at 10%, meaning that its largest holding cannot account for more than 10% of the total ETF's weight. As briefly mentioned earlier, they play vital roles in the energy industry, ensuring the efficient transportation and delivery of natural gas, LNG, and other energy products to meet market demand. MLPX is heavily concentrated in the U.S., accounting for 81% of the total assets, and the remaining 19%, stemming from Canadian assets.

It's largest holding is ONEOK Inc ( OKE ) , a leading midstream service provider in the United States, specializing in natural gas gathering and transportation. They connect prolific supply basins with key market centers.

Other notable holdings include Cheniere Energy Inc ( LNG ) , which is involved in the liquefied natural gas ((LNG)) business, and The Williams Companies Inc ( WMB ) , which focuses on natural gas transportation and storage. Moreover, it includes Enbridge Inc ( ENB ) , a Canadian company involved in the transportation and distribution of crude oil, natural gas, and renewable energy products. Enbridge operates pipelines, storage facilities, and renewable energy projects across North America.

Overall, the portfolio has a weighted average market capitalization of roughly $30 billion. Its valuation is quite attractive, trading at an average price-to-earnings (P/E) ratio of 11.92 and a price-to-book (P/B) ratio of 2.32. This compares to the S&P 500, which trades at a 23.8 times P/E. The ETF has a distribution yield of 5.30%, representing its annual dividend.

Performance

For most of the past year, MLPX ETF lagged behind the broader market, primarily because prominent technology companies flourished on the back of increasing optimism about AI growth. With major tech firms like Microsoft ( MSFT ), Meta Platforms ( META ), and NVIDIA ( NVDA ) holding significant portions of the S&P 500 ( SPY ) and experiencing substantial growth over the previous year, the ETF returned 10% year-over-year (YoY). In contrast, MLPX slightly outperformed due to a recent jump in oil prices, returning 10.7% year-over-year.

Last year saw a marked drop in oil prices, plummeting from almost $100 a barrel to under $70. While there has been a recovery influenced by OPEC's reductions in production , oil prices are still down by around 5% YoY. Because of the tight link between oil prices and the revenue of energy components in major energy ETFs, other energy ETFs could not outperform the broader market over the past year.

MLPX performed notably better than other energy ETFs such as the well-known Energy Select Sector SPDR Fund ETF ( XLE ) , which tracks the Energy Select Sector Index and provides exposure to the energy sector of the U.S. equity market. In comparison to MLPX, XLE focuses on large-cap energy names, investing roughly 40% of its total assets in Exxon Mobil ( XOM ) and Chevron Corp. ( CVX ). As smaller cap energy names such as ONEOK outperformed large caps last year, being up 13% YoY, in comparison to Chevron which fell 11% YoY. It also has a slightly lower distribution yield, paying out a 3.36% annual dividend. Nevertheless, XLE has a smaller expense ratio of just 0.10%.

The ETF also outperformed First Trust North American Energy Infrastructure Fund ( EMLP ) , which actively invests in both MLPs and other energy infrastructure companies, providing a broader exposure. While the ETF shares a few names with MLPX, it places a higher weight on companies such as Enterprise Products Partners L.P. ( EPD ) and Energy Transfer LP ( ET ) , which are also prominent players in the midstream energy sector, primarily focusing on the transportation, storage, and processing of oil, natural gas, and related products. While EMLP has only a slightly different allocation strategy, it has a significantly higher expense ratio than MLPX with a total expense ratio of 0.95%. Its distribution yield currently stands at roughly 4%.

Overall, MLPX's performance will likely be heavily dependent on future oil prices. As a result of global production cuts and ongoing global conflicts, oil and energy prices could stay elevated which could benefit MLPX, at least in the short term. However, a slump in global trade and demand could also negatively impact oil prices going forward, and thus likely dampen the performance of MLPX.

Takeaways

One of the main benefits of investing in MLPX ETF is the potential for a high yield, given that MLPs often distribute a significant portion of their cash flow as dividends. The energy infrastructure sector can also offer some insulation from the volatile price movements of energy commodities since many midstream operations have fee-based, long-term contracts. However, the investment is not without risks, which might include fluctuations in energy prices, regulatory changes, and specific risks associated with the MLP structure.

In my opinion, while MLPX boasts an expense ratio that is lower than several comparable ETFs, for those looking at a long-term investment horizon, XLE might present a more attractive option due to its even lower expense ratio.

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