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A Trio of Energy Infrastructure ETFs

05/14/2018 5:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

Despite strong fundamental improvements the energy infrastructure group has been mired in a two-year long bear market, explains income expert Tim Plaehn, editor of The Dividend Hunter.

You can see from this three-year chart of the Alerian Infrastructure MLP Index (AMZI) that the large MLPs which represent the infrastructure sector have been in a steady decline since early 2017.


The AMZI index hit a recent bottom in the last week of March and the recovery has now sustained itself for about five weeks. If this rally sustains for a few more weeks, the investing public will get very interested in stocks with high yields and rising share prices. The buying interest will sustain a rally that could last several years.

The energy infrastructure sector is now evenly balanced between companies using the master limited partnership (MLP) structure and those organized as corporations.

Packaged investment products like ETFs and closed-end funds are a good way to play the coming bull market in this sector. And a key benefit for you is getting paid an attractive dividend yield along the way.

Kayne Anderson Midstream Energy Fund (KMF) is a closed-end fund with an investment objective to provide a high level of total return with an emphasis on making quarterly cash distributions to its stockholders. The fund can invest in both MLPs and energy midstream services corporation.

The fund is following the shift to a higher proportion of corporations in the sector. Kayne Anderson Midstream Energy Fund currently yield 9.6%.

Currently the top five holdings in the fund are corporations or 1099 reporting MLP alternatives. For example, the third largest holding is Plains GP Holdings LP (PAGP) which reports on a 1099.

Each PAGP share is backed by one MLP unit of pipeline partnership Plains All American Pipelines LP (PAA). The fund's top holding is natural gas midstream company ONEOK, Inc. (OKE).

American Energy Independence ETF (USAI) is a new ETF focusing on the corporate energy infrastructure companies. This fund is a bet that the sector will continue to shift away from the MLP sector.

USAI will also be more tax efficient than an MLP heavy fund. Under the current tax rules, any fund that has more than 25% of its assets in MLPs does not qualify for the tax-free pass through status of a Registered Investment Company.

MLP funds are organized as corporations and pay corporate income tax on realized capital gains. This fact could allow USAI to outperform MLP funds by 3% to 4% per year in a rising market. The shares currently yield about 5%.

InfraCap MLP ETF (AMZA) is an actively managed MLP ETF. The fund managers use the AMZI components their investment pool but can own different weights of the sector MLPs and can also own related corporation shares. In January, the fund changed to monthly dividend payments and the shares currently yield 18.2%.

Energy Transfer Partners LP (ETP) is the current largest holding, accounting for 14.7% of the total portfolio. MPLX LP (MPLX) has a similar weight at 14.6%. AMZA managers also sell call options to boost the cash return to investors.

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