U.S. investors are zeroing in on exchange-traded funds that track master limited partnerships as a way to bet on long-term North American energy boom even as oil prices slide, convinced that these funds look relatively cheap and promise growth.
Master limited partnerships typically invest in energy infrastructure such as oil and gas pipelines and storage facilities. That makes them less affected by the decline in oil because such assets are more sensitive to volume of flows than commodity prices and usually have long-term contracts with producers.
They also offer high yields in a low rate environment. The Yorkville MLP Universe Index, which tracks all MLPs, yielded 5.4 percent at the end of November, double that of 10-year Treasury bonds.
Among the biggest MLP exchange-traded funds, the Alerian MLP ETF and the UBS ETRACS Alerian MLP Infrastructure Index ETN saw the largest net inflows last month of $161 million and $110 million, respectively.
The Alerian fund, which is the most expensive MLP ETF, was up 7.7 percent so far this year through Friday, while the UBS ETF was up 11 percent.
In contrast, traditional energy funds, such as the SPDR S&P Oil & Gas Exploration & Production ETF and the United States Oil Fund are both down about 29 percent, according to Lipper data. Most of that decline has come since June, when crude oil began its months-long slide.
MLP funds have edged down so far this month along with the broader energy sector after the oil cartel OPEC’s decision maintain its output. That is seen putting pressure on North American producers and led some investors to expect to eventually weigh on MLPs. And to be sure, if oil prices dive further and stay low for long, the slump could lead to project cancellations.
But some analysts and investors see the dip as a buying opportunity.
They say the funds are now cheap by historical standards, while the long-term outlook for the sector remains good – there is still a widely recognized need to build more U.S. energy infrastructure.
“MLPs are in a good spot,” said Rob Glownia, a quantitative analyst with RiverFront Investment Group.
MLP cash distributions, a key indicator of their health, remain strong. Roughly 98 percent of all MLPs either maintained or grew their distributions versus last year, according to data from Yorkville Capital Management LLC.