MLP Funds Withstanding Oil’s Swoon

Master limited partnership ETFs differ from broad energy ETFs in avoiding oil’s four-month decline.

The sharp decline in oil prices has hit energy-sector ETFs hard. But a subset of the energy funds has stood up reasonably well: master limited partnerships (MLPs).

MLPs are typically involved in the transportation of energy, such as pipelines. While their unique structure and high yield often attract headlines, MLP funds often cite their low sensitivity to oil prices as a benefit. The analogy is a toll road: MLPs collect the toll, but are indifferent to the price of the cars that drive on it.

After seeing a recent graph of oil’s free fall since mid-June, I wondered how well that claim was holding up.

Avoiding The Worst Of It

The graph below shows the two largest MLP ETFs, the Alerian MLP ETF (AMLP) and the JPMorgan Alerian MLP ETN (AMJ). I’m comparing them with oil prices (WTI futures) and the largest energy ETF, the Energy Select SPDR (XLE | A-97), as a reference.

So far, the MLPs are holding up well—they haven’t shown a clear decline with the price of oil since its June 20 high. Sure, they sold off hard on Thursday 10/9, but so did every else. In contrast, note how XLE has been dragged down by oil’s swoon.

It stands to reason that MLPs might suffer if actual production slows, which could occur if prices keep diving.

A Different Drummer

As a second quick check of the impact of oil prices on MLP ETF prices, I ran correlations of daily returns over the past two years for the top five MLP ETFs by AUM against oil futures returns.

These correlations are much lower than those of the top five energy ETFs versus oil. MLP correlations are lower than for S&P 500 stocks as well, as represented by the SPDR S&P 500 ETF (SPY | A-97).

Maybe oil’s slump will drag down MLP ETFs going forward, but so far they’re holding their own.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.