Oil’s sharp rebound sparked a major rally in our energy picks, including two concentrated, high-yielding funds suitable for investors comfortable with non-diversified portfolios, explains fixed-income expert Tim Begany in Personal Finance.
These two picks have different formats. Alerian MLP ETF (AMLP) is an exchange-traded fund and the Tortoise Energy Infrastructure (TYG) is a closed-end fund, so both are bought and sold like individual stocks.
Though packaged differently, Alerian and Tortoise invest alike, holding concentrated portfolios of master limited partnerships. These MLPs were formed specifically to own and operate energy infrastructure such as pipelines and oil storage facilities.
Because energy infrastructure is heavily used regardless of what oil prices do, MLPs usually produce lots of cash. This often translates into exceptional dividend yields, such as Alerian’s 7.5% yield.
The yield on closed-end funds is referred to as a distribution rate, as payouts may include other forms of income besides dividends (such as capital gains).
The distribution rate is expressed as a percentage of the fund share price, just like yield. The Tortoise fund currently has a hefty 8.5% distribution rate.
But remember, these funds aren’t diversified. Alerian tracks an index of 25 domestic MLPs, while Tortoise’s large management team assembles a portfolio of 30 of these partnerships.
Although Alerian quotes an expense ratio of 0.85%, that’s only the management fee. Expenses actually total about 5% of assets, versus 1.82% for the Tortoise fund.
Alerian is a corporation and must, by law, pay taxes on profits before distributing dividends. Shareholders bear that corporate tax burden. The added cost does come with substantially lower volatility, though.
Alerian fluctuates 25% less than the Tortoise fund. So investors at ease with a lack of diversification should pair the fund up with Tortoise in their portfolios.
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By Tim Begany, Editor of Personal Finance
