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Dividend Hunter Finds ETF for MLPs

05/01/2015 9:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

You can find a wide range of attractive yields among MLPs; however, in some circumstances an investor would like to own a basket of MLPs in a single fund-type product, suggests Tim Plaehn, in The Dividend Hunter.

If an MLP focused fund has more than 25% of its assets in partnership units, the fund cannot qualify as a non-taxable, regulated investment company. For this reason, I have not recommended an ETF in the MLP sector.

Introducing, InfraCap MLP ETF (AMZA). Launched in October 2014, AMZA was established as one of a new breed of ETFs. AMZA is the first actively managed ETF in the MLP-focused space.

The fund manager can weight its holdings differently than the Alerian MLP index, which is market cap weighted and tracks the 25 largest midstream MLPs, with bigger MLPs having a greater weight on fund performance.

AMZA will weight these same MLPs based on the return potential from the management team's proprietary algorithm.

The fund can also own the publicly traded general partner (GP) companies of the index components, which can produce extra capital gains and a faster growing distribution cash flow stream.

The fund can also sell call options (covered call strategy) to generate extra cash income from the portfolio. Leverage in an MLP fund helps offset a portion of the corporate income tax drag.

Before the prices of crude oil and natural gas started their steep declines in the last third of 2014, the MLP sector had been producing outstanding returns for investors.

There may be a few more rough patches for the MLP sector, but long-term investors will do well with the basket of MLPs represented by AMZA.

The InfraCap MLP Fund paid $0.50 per share as its first quarterly dividend. That's a 9.4% yield.

AMZA works as an attractive high-yield choice for investors who want energy sector and MLP exposure but do not want to own individual units.

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