I have outlined why fundamentals look best at market highs, and worst at market lows. Just like we n...
3 Ways to Play MLPs
03/10/2015 9:00 am EST
Many midstream MLP operators provide transportation and storage services and are paid based on the volume of product moved, explains Benjamin Shepherd, editor of Investing Daily’s Personal Finance.
Essentially logistics companies, those midstream MLPs are largely insulated from volatile commodity prices as long as production remains relatively steady.
That reduced volatility is one of the reasons we’ve long found midstream MLPs attractive income plays and one of the reasons why the Alerian MLP ETF (AMLP) is included in our portfolio.
With a three-year beta of just 0.39, it’s only about a third as volatile as the average energy investment. It also throws off an extremely attractive 6.6% yield while issuing the familiar 1099 at tax time rather than a K-1.
ALPS Alerian MLP does have one key drawback, though: cost. It is structured as a C-corporation, which leaves it liable for corporate-level income taxes. Given that added layer of cost, the fund’s total expense ratio actually comes in at 8.56%.
An alternative is Tortoise Energy Infrastructure (TYG), another portfolio holding. Structured as a closed-end fund, it focuses on midstream MLPs with a basket of 37 holdings.
Tortoise has been in operation for more than a decade now and ranks at the top of the MLP fund category over that period with a trailing return of 11.3%.
That better return has a couple of caveats, though: higher volatility and a lower 5.6% yield. It also uses leverage to boost returns, which increases volatility.
Tortoise Energy Infrastructure is also significantly less expensive to own than the ALPS fund, with a total expense ratio of 1.38% and it also issues a 1099.
With the performance drag of its tax bill, the ALPS fund is best for those primarily interested in high current income, while the Tortoise fund is a solid bet for those more interested in price appreciation.
A final option for investing in midstream MLPs is UBS ETRACS Alerian MLP Infrastructure ETN (MLPI). As an ETN, distributions are taxed as interest income, and investors have no recourse if an ETN goes bust.
That said, the fees on this particular ETN are just 0.85%, making it one of the least expensive ways to have exposure to a basket of MLPs. That also happens to make it the best overall long-term performer of the three in terms of capital appreciation.
It is, however, the lowest yielder, at 4.8%. But if you’re after capital gains and plan on holding onto the investment for the long haul, the lower cost makes this your best bet.
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