Are MLP ETFs At Risk? [Alerian Mlp, UBS AG ETN, ETRACS Alerian MLP Index ETN]

Is there Any Hope?

Probably Yes. First of all, if at all the nominal rate starts going up, analysts believe that the rise in inflation-adjusted real rates in 2014 might be lower than last year.

On the contrary, the Fed’s decision on further taper in 2014 will depend on whether inflation and employment perk up at a desired pace. That means that a gradual interest rate rise in a modestly inflationary environment may not prove that bad for the rate-sensitive sectors (read: REIT ETFs in Taper Aftermath: Any Hope for Gains Now?).

MLPs are relatively safe and less risky options in the broader energy space. This can be validated by the fact that when oil as commodity was weak in most of 2013 thanks to the strength in the greenback, oil producing ETFs especially those in the MLP ETF space were better placed.

Further, with consistent growth in the energy industry expected from new developments in the field of unconventional energy, energy MLP ETFs should benefit considerably over the long term. After all, rates do not always rise on tightening of monetary policy. A growing economy and increased business activities may also push the rates higher.

ETF Impact 

In such a scenario, investors might want to pay close attention to the MLP market in the near term. Below, we briefly highlight the some funds in the space which could be great picks for 2014.

Some top MLP ETFs like Alerian MLP ETF (NYSEARCA:AMLP), JP Morgan Alerian MLP Index ETN (NYSEARCA:AMJ), UBS E-TRACS Alerian MLP Infrastructure Index (NYSEARCA:MLPI) lost 0.46%, 0.31%, 0.36% in the first 10 days of January while SPDR S&P 500 (NYSEARCA:SPY) added 0.17% during the same time frame. One fund ETRACS Alerian MLP Index ETN (NYSEARCA:AMU) however gained 0.11% in the short period.

The return figures confirm the fact that MLPs were not severely beaten down post taper announcement. The mild losses were in line with the broader market and may be were reflections of pent-up profit booking activity.

AMLP is an extremely popular choice in the space with more than $7 billion in assets, but funds like AMJ ($5.7 billion) and MLPI ($1.6 billion) also attract sufficient investments. Among these, AMU is a slightly overlooked option with around $200 million of assets. Investors should also note that all four funds currently have a dividend yield of more than 3% (more than the 10-year Treasury bond yield) with AMLP boasting as high as 6.09%.

Bottom Line

As the market has essentially priced in some cuts to the QE program this year,  we do not expect much disruption in the interest rate world if the Fed pairs down its stimulus gradually. Though some psychology-induced sell-offs will be there in MLPs with each Fed announcement, the inherent fundamentals of the sector should remain strong.

This article is brought to you courtesy of Eric Dutram.

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