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Top Picks 2017: InfraCap MLP ETF

01/09/2017 6:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

I am forecasting that the energy midstream infrastructure sector will again be a growth sector in 2017 and there is lots of upside potential in the group, suggests Tim Plaehn, editor of The Dividend Hunter.

Instead of trying to pick one stock in the group, I am recommending one of the more aggressive MLP focused exchange-traded funds — InfraCap MLP ETF (AMZA).

The fund owns the same MLPs as the ones tracked by the Alerian MLP Infrastructure Index, with the following possible enhancements:

* The fund manager can weight individual MLPs holdings different than the index.

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

* The fund can own the publicly traded general partner companies of the index component MLPs.

* The fund can sell call options (covered call strategy) to generate extra cash income from the portfolio.

Fund managers can use a moderate amount of leverage (up to 33% of the portfolio). Leverage in an MLP fund helps offset a portion of the corporate income tax drag.

Fund assets have grown tremendously this year, currently $135 million, compared to about $19 million at the start of 2016. The rapid growth in assets provides some challenges for the fund managers, but is very good news for us investors for the long-term.

The popularity has been due to the high dividend yield. The fund managers have used covered call income to supplement the distribution cash flow from the MLP holdings.

The quarterly dividend has been steady since the fund was launched in late 2014. However, the share price has declined with the drop in MLP values. The result is an ETF that now yields 18%.

I have regular contact with the fund managers, and they believe they can sustain the high dividend. In 2017 AMZA should produce double barrel profits, with a very high dividend yield combined with a strong recovery in MLP unit values.

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Editor's Note: Tim's Plaehn's Top Pick for aggressive investors last year was Archrock (AROC), which returned 98% in 2016, including dividends. His conservative Top Pick last year — Reaves Utility Income Fund (UTG) — also produced a strong 29.5% total return.  

Tim now explains, "Archrock was chosen at a time when there were a lot of severely beaten down energy midstream stocks. The stock has had its run and profits should be taken. Meanwhile, UTG remains an attractive income investment.

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