2023-11-05 23:08:01 ET
Summary
- The energy sector is barely positive YTD, utilities down 10%, but niche MLP fund AMZA outperforms.
- InfraCap MLP ETF uses leverage and fundamental analysis to target strong total returns.
- AMZA has high exposure to value style, low P/E ratio, and high dividend yield, but a concentrated portfolio and poor liquidity pose risks.
The broad Energy sector is barely positive year to date, as measured by the Energy Select Sector SPDR ETF (XLE). Utilities, meanwhile, are down 10% on a total return basis in 2023. Outperforming the S&P 500, though, is one niche MLP fund that uses some leverage.
I have a buy rating on the InfraCap MLP ETF (AMZA). While it is a high-risk fund given the leverage strategy and high concentration of holdings, the valuation is favorable while technical momentum is solid.
AMZA Outperforming Energy, Utilities, SPX YTD
According to the issuer , AMZA seeks to provide exposure to midstream master limited partnerships (MLPs) with an emphasis on high current income. The ETF employs modest leverage (typically 20-30%) to target strong total return results, and security selection and weightings are based on security-level fundamental analysis and technical factors instead of market capitalization.
AMZA typically invests in 25-35 midstream MLPs, including publicly traded limited partnerships and limited liability companies taxed as partnerships, as well as related general partners. Finally, options strategies are used in an effort to provide a source of income. On a total return basis, AMZA is at levels not seen since late 2018.
AMZA is a small ETF with just $344 million in assets under management as of November 3, 2023. Its forward dividend yield is high at 8%, though a volatile distribution history warrants a poor Dividend ETF Grade by Seeking Alpha. Momentum has been very strong recently, however, earning the fund an A+ rating and ranking it top in its Sub Class.
Unfortunately for those interested in AMZA, its annual expense ratio is high at 1.64%. Of course, that is partly due to the leverage technique employed. Still, the ETF is highly risky based on returns and price action while liquidity is not particularly great. Average daily volume is just 37k shares while its 30-day median bid/ask spread can be wide at times, so using limit orders during the trading day is suggested.
The 3-star, neutral-rated ETF by Morningstar has high exposure to the value style while there's significant mid- and small-cap access with the fund. Also when analyzing the Style Box, you will find just 8% allocated to the growth style, with no holdings fitting the large-cap growth bill.
Still, its price-to-earnings ratio of 10.6 is exceptionally low while long-term earnings growth is not all that high at 5.7%, making for a PEG ratio close to the market's average. AMZA ranks high on the yield factor given its 8% payout rate and share-price momentum has been decent lately. Risks include the portfolio's low earnings quality and poor liquidity.
AMZA: Portfolio & Factor Profiles
AMZA is primarily an Energy sector fund with just modest exposure to Utilities. Also, the ETF uses leverage in its strategy, resulting in a significant short cash position. In all, the top 10 positions comprise more than 111% of the holdings and its 8% dividend yield is paid out in monthly increments.
An important risk to consider is that AMZA is a very concentrated portfolio, so keeping a close watch on the fundamental and technical trends of its major holdings is prudent.
AMZA: Holdings Information & Dividend Stats
Seeking Alpha
Seasonally, the November through March stretch is not as favorable for AMZA as it is for the broader market, so this is a bearish indicator, according to data from Equity Clock .
AMZA: Bearish Seasonal Trends Ongoing
The Technical Take
AMZA continues to consolidate in an ascending triangle pattern. Notice in the chart below that there's apparent resistance in the mid-$30s. Now, with a high-payout product like this, technical analysis should be weighed a bit less in the overall analysis process. Still, the ETF has inched above its $34-$35 highs from 2022 and early 2023.
A breakout would portend a measured move price objective to the low $40s. I also see possible resistance around $47 - that's the late 2018 low and the early 2020 pre-COVID peak. With a high amount of volume by price in the $22 to $32 zone, pullbacks should have plenty of buying pressure/support based on that potential natural demand. What's more, with a steadily rising long-term 200-day moving average, the bulls are in clear control.
Overall, the chart is constructive, and being long here with a stop under $28 seems to make sense.
AMZA: Bullish Uptrend, Inching Through Resistance
The Bottom Line
I have a buy rating on AMZA. This is a risky product, no doubt, but the strategy has worked well in the last few years. Its valuation is modest, and the technical trend is positive.
Additional disclosures:
1) The Lowdown on Leveraged and Inverse Exchange-Traded Products (FINRA)
2) Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors (SEC)
3) FINRA's Reminder on sales practices for Leveraged and Inverse ETFs (FINRA)
For further details see:
AMZA: Steady Trend Higher, Portfolio Remains Undervalued With Strong Momentum