MLP Funds Withstanding Oil’s Swoon

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

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Senior ETF Specialist
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Reviewed by: Paul Britt
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Edited by: Paul Britt

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.

Oil MLP return chart

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.

ETFCorrelation
To Oil
Alerian MLP (AMLP)0.29
JPMorgan Alerian MLP ETN (AMJ)0.25
First Trust North American Energy Infrastructure (EMLP)0.33
ETRACS Alerian MLP Infrastructure ETN (MLPI)0.28
Credit Suisse Cushing 30 MLP ETN (MLPN)0.26

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).

ETFCorrelation
To Oil
Energy Select SPDR (XLE)0.48
Vanguard Energy (VDE)0.49
iShares U.S. Energy (IYE)0.48
First Trust Energy AlphaDEX (FXN | B-60)0.47
PowerShares DWA Energy Momentum (PXI | B-36)0.46
SPDR S&P 500 (SPY | (A-97)0.32

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.

 

Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.