2023-12-18 12:19:19 ET
Summary
- Alerian MLP ETF is a passively managed ETF that focuses on energy infrastructure MLPs.
- MLPs earn cash flow from midstream activities, such as operating pipelines and storage facilities and could benefit from regulatory tax advantages of the 2022 Inflation Reduction Act (IRA).
- AMLP is a high-yield ETF with predictable cash flow that limits volatility due to long-term contracts and built-in inflation and cost adjustments.
Alerian MLP ETF ( AMLP ) is a passively managed ETF that delivers exposure to energy infrastructure Master Limited Partnerships (MLPs) that earn the majority of their cash flow from midstream activities. The world is undergoing an energy transition from traditional carbon-based sources like coal, crude and natural gas to clean and renewable sources. Back in the 1990s, natural gas became the clean fuel alternative to coal. Subsequently, natural gas plants and infrastructure grew tremendously.
The continued investment in natural gas infrastructure is expected to continue over the next decade with this transformation, including decarbonization projects and liquid natural gas ((LNG)) build out. According to the IEA World Energy Outlook in 2022, natural gas made up 23% of primary energy consumption across the world the previous year.
Statistically, AMLP has what I really like in an ETF, but many of my peers don't: it is highly concentrated, with only 15 holdings, and just five make up 77% of the total. I like this because I'm only going to allocate a small portion of a portfolio to this industry. So I don't need 50 or 100 stocks to cover perhaps 10-15% or so of an income or total return portfolio. AMLP is a big fund at over $6 billion in assets, and trades plenty of volume. I like this part of the market and I like this ETF, but until interest rates steady, I will limit my enthusiasm to a solid Hold rating.
Victory through LNG
In the 2023 IEA Outlook , LNG projects are expected to explode beginning in 2025, increasing over 45% current status. The transformation to clean energy will take decades to complete and will rely on the pivotal infrastructure midstream companies have and will continue to develop.
AMLP seeks to offer investors income potential with its high distributions and inflation-protected cash flows with its real asset exposure. AMLP makes a highly concentrated bet on its investment theory by only averaging 10-15 holdings at any given time with an average annual 26% portfolio turnover. The top 10 holdings comprise over 94% of its AUM.
Contrast AMLP to EMLP, another MLP ETF, which has over 60 holdings and its investment philosophy is to diversify midstream pipelines with utility allocations. As you can see by EMLP's performance, utility stocks have dragged down total returns during 2023, as they are highly sensitive to rising interest rates. In addition, AMLP has persevered through a mediocre year for returns on energy stocks. So clearly, there is something different happening here. And it has to do with the very mundane but attractive role MLPs play in the infrastructure business.
Midstream operators, like purely AMLP, connect energy supply to local and global demand by building, operating, and owning energy infrastructure assets that include pipelines, processing plants, and storage facilities. Because of the nature of the business, contracts tend to be long-term, from 1-25 years in length, with built-in inflation and cost adjustment clauses.
As such, cash flows are more predictable and even considered "toll-like" translating to less volatile distributions of the ETF. Hence, AMLP's cash flow is not subject to the often wild swings commodity prices can take. It's hard to argue with AMLP's 8.4% dividend yield.
If yields would ever just calm down, AMLP will look even better
With MLPs, it helps to break down their value into two components: the yield and the price fluctuation. Because any ETF that yields more than 8% is obviously taking a risk somewhere else. You don't get that kind of yield for free. The chart above shows that the price component over 3-year periods during the last decade has been fairly consistent, except for the pandemic (where it cratered) and during the past two years (where it rallied back from that decline).
But if investors can come to rely on a lower level of price fluctuation than we've seen in this unusual period, that could dramatically increase the appeal of AMLP. But that will take a settling of interest rates, not the feast or famine we've seen for the better part of the last 15 years.
I have been a technician for over 40 years, but my approach to charting is a bit different from the usual. As such, I'm not the biggest fan of the 200-day moving average… unless it looks like this. That's a 3-year uptrend, and as long as it doesn't break down severely, that's a good look for AMLP.
AMLP: pulling it all together
With a worldwide march to green and renewable energy, the mainstream MLP space is positioned well for continued growth and strength in infrastructure build-out. This is particularly true given the backdrop of the US 2022 Inflation Reduction Act (IRA), which will provide magnanimous tax incentives to midstream builders, operators, and processors for decades.
AMLP is the largest ETF in this space providing above-average liquidity in the MLP space. It has a highly stable dividend yield, supported by steady long-term contracts. As an MLP ETF, investors may benefit from its tax structure and receive a typical 1099 rather than a K1 for reporting purposes. I also think the regulatory policies will favor the sector for many years. It's a solid ETF, but I limit my current rating to a Hold.
For further details see:
AMLP: A Solid, 8% Yielding ETF With A Focused Portfolio, The Way I Like It