UMI - UMI: Active Strategy Focused On Energy Infrastructure Underperforms Passive ETF
2023-04-11 15:58:35 ET
Summary
- USCF Midstream Energy Income Fund ETF is an active exchange-traded fund focused on energy infrastructure companies.
- In the fund's short operating history, it has significantly underperformed passive ETFs such as the AMLP, both in terms of returns and distributions.
- Until the manager can demonstrate alpha from their active strategy, I recommend investors interested in energy infrastructure companies to buy the AMLP ETF instead.
The USCF Midstream Energy Income Fund ETF (UMI) is an actively managed exchange-traded fund ("ETF") focused on midstream energy infrastructure companies. In the fund's short operating history, the UMI ETF has significantly underperformed passive ETFs focused on the energy infrastructure sector. Although this underperformance could be due to limited operating history, I would recommend investors interested in the sector to avoid the UMI ETF for now, pending better performance.
Fund Overview
The USCF Midstream Energy Income Fund ETF is an actively managed ETF focused on investments in the midstream energy infrastructure sector. The fund manager uses bottom-up fundamental research to evaluate midstream energy infrastructure companies involved in the transportation, storage, gathering, and processing of oil, natural gas, and other petroleum products.
The UMI fund may invest up to 25% of its assets in equity securities of master limited partnerships ("MLPs").
The UMI ETF has almost $200 million in assets and charges a 0.85% expense ratio.
Portfolio Holdings
The UMI ETF is a fairly concentrated fund with only 23 holdings (Figure 1). The top 10 holdings of the fund account for 65.1% of the fund.
Figure 1 - UMI portfolio holdings (uscfinvestments.com)
Returns
The UMI ETF is a young fund, with an inception date of March 23, 2021. Therefore, it does not have a lot of operating history. However, many of the companies the UMI ETF invests in have been around for decades and there are passive investment vehicles focused on the midstream energy infrastructure sector that investors can consider and compare with.
Figure 2 shows the historical returns of the UMI ETF. The UMI ETF had a strong 2022, with 20.7% returns. However, most of the performance appears to have been achieved in the beginning of 2022, as the 1Yr return to March 31, 2023 was -1.2%.
Figure 2 - UMI historical returns (morningstar.com)
The returns of the Alerian MLP ETF ( AMLP ), a passive ETF focused on midstream energy infrastructure companies, is shown in Figure 3 for comparison purposes. As we can see by comparing figures 2 and 3, UMI's strong 2022 return was a result of a strong sector, and not due to the manager's stock-picking prowess. In fact, the UMI ETF underperformed the passive AMLP ETF by 4.6% in 2022, and 10.1% in the trailing 12 months to March 31, 2023.
Figure 3 - AMLP historical returns (morningstar.com)
Distribution & Yield
As midstream energy infrastructure companies tend to pay attractive dividend yields, the UMI ETF is likewise able to pay investors an attractive distribution, with a trailing 12 month distribution of $1.69 / share or 5.1% distribution yield (Figure 4). UMI's distribution is paid quarterly, and the most recent distribution of $0.42 was paid on February 28, 2023.
Figure 4 - UMI distribution yield is 5.1% (Seeking Alpha)
However, investors should note that the AMLP ETF mentioned above pays a quarterly distribution that yields 7.9%, significantly higher than the UMI ETF (Figure 5).
Figure 5 - AMLP distribution yield is 7.9% (Seeking Alpha)
UMI vs. AMLP
Whenever I see an active fund like the UMI ETF, I always try to compare it to a similar strategy, to see if the manager's active " skill" contributes alpha.
Unfortunately, in the case of the UMI ETF, the active component of the strategy appear to have detracted from fund performance in UMI's short operating history. Comparing the UMI ETF vs. the more established AMLP ETF, we can see that AMLP outperformed UMI by over 4.6% in 2022 and by 10.1% in the twelve months to March 31, 2023.
Comparing the two fund's distributions, the AMLP ETF pays a more attractive 7.9% distribution yield compared to UMI's 5.1%.
In terms of fees, the two funds are comparable as both charge 0.85% expense ratios. However, due to AMLP's larger size ($6.5 billion in assets vs. $200 million for UMI), it has a much lower bid/ask spread of 0.03% vs. 0.23% for UMI (Figure 6).
Figure 6 - UMI vs. AMLP expenses (Seeking Alpha)
In summary, I don't see any reason why one should buy the active UMI ETF over the passive AMLP ETF at this time.
Conclusion
The USCF Midstream Energy Income Fund ETF is an actively managed ETF focused on the midstream energy infrastructure sector. In the fund's short operating history, the UMI ETF has significantly underperformed the passive AMLP ETF while also paying a lower distribution yield.
Although the underperformance could be due to the fund's short operating history, I would recommend investors interested in energy infrastructure assets avoid the USCF Midstream Energy Income Fund ETF for now, as there is no indication UMI's "active" management adds any alpha.
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UMI: Active Strategy Focused On Energy Infrastructure Underperforms Passive ETF