The top-performing ETF segment isn't technology stocks or defense companies—not even single-country funds. Overwhelmingly, it's master-limited partnerships (MLPs).
Over the past month, 17 of the 20-best-performing ETFs (excluding leveraged and inverse products) have been U.S. MLP ETFs. The top performers are listed in the table below:
Sources: ETF.com, FactSet. Data as of Aug. 13, 2018. Data show change in trailing 30-day price total return.
Big and small MLP funds have outperformed. The top performer was the tiny $10.3 million ETRACS Alerian Natural Gas MLP ETN (MLPG), which rose 13.4% over the past 30 days. However, the second highest was the $1.7 billion ETRACS Alerian MLP Infrastructure Index ETN (MLPI), which rose 12.5%.
What Are MLPs?
MLPs, which are publicly traded master-limited partnerships, offer investors a unique take on the energy sector. These tax-advantaged, "toll-road"-style companies, which are typically involved in energy infrastructure, make money based on the volume of product that travels through their facilities. Think gas pipelines, for example, or oil refineries.
Although oil and gas prices are important for MLPs, they don't matter as much as overall energy demand, which tends to be relatively stable and inelastic. After all, consumers need to heat their homes and fuel their cars, no matter what it costs; and as such, fuel will flow through pipelines and in and out of refineries, no matter what petroleum prices are. This inelasticity of demand shields MLP investors from much of the day-to-day pricing volatility that characterizes global commodities markets.
But MLPs offer another benefit for investors: Businesses structured as MLPs don't pay corporate income tax on their profits, as long as those profits are paid out to investors as dividends.
That makes MLPs some of the best income-producing investments around; historically, distribution yield for MLPs has been 6-9% per year, with roughly 6% annual growth. In particular, the $685 million InfraCap MLP ETF (AMZA) is a yield-producing machine; it currently offers a 21.01% dividend yield, the fourth-highest of any ETF, MLP or no (read: "This MLP Fund's Yield Reels In Assets").
Why Are MLP Prices Down?
It's a good time to be in the energy production business, as the fundamentals for the North American energy sector haven't looked this good in decades. Production of crude oil in the U.S. and Canada has nearly doubled in the past 20 years, due to the hydrofracking revolution; and the U.S. is now the world's largest producer of petroleum products, including natural gas.
Yet MLPs are trading at fairly modest valuations, wrote Invesco's Real Estate team in a recent post. The authors credit flagging energy prices, which, despite rising recently, still fall well below their historical highs.
For example, 10 years ago, West Texas Intermediate (WTI) crude oil, the U.S. oil benchmark, was striking its all-time high of $145.31/barrel. Today it trades closer to $70/barrel. MLPs can shrug off some price volatility, but not that much.
Exacerbating the problem, the authors write, is the fact that the correlation between oil and gas prices and MLPs has been rising, ever since the financial crisis.
"We believe a dislocation has developed between MLP prices, commodity volumes and commodity prices," wrote Invesco. "In our opinion, given the volume-based MLP business model, MLP prices should be moving much more in line with commodity production volumes (rather than with commodity prices)."
Big Monthly Outflows
For the past few years, MLPs have been looking to boost their bottom lines. Several big MLP firms have consolidated or been bought out, while others have cut their distributions to shareholders—undermining why income-seeking investors turn to MLPs in the first place.
Perhaps that's why MLP ETFs' recent spate of good performance hasn't lured investors back to the space. Over the past 30 days, the 28 U.S.-listed MLP ETFs have lost a combined $340 million in outflows.
That's primarily due to investors yanking funds from the largest MLP ETF in the space, the $10.5 billion Alerian MLP ETF (AMLP), which has seen net outflows of $417 million since July 13. (Read: "What To Do About MLPs After Turmoil.")
However, on Aug. 1, Energy Transfer Equity LP announced it would buy out its sister company Energy Transfer Partners, AMLP's largest holding, at 11%. Since the news, $98 million has flowed into AMLP.
Year-to-date, MLP ETFs have brought in $55 million in new net inflows.
Contact Lara Crigger at [email protected]