After a calm summer, the markets are having a tough time coping with global growth worries and Fed policy uncertainty. The International Monetary Fund has recently downgraded its outlook for global growth due to weak Eurozone conditions and a slowdown in several emerging market nations as well.
In fact, these deepening concerns are weighing heavily on the two important benchmarks – Dow Jones Transportation Average and the small-cap Russell 2000 Index – which are considered technical indicators for the broader direction of the market.
Given the equity market volatility and the fact that traditional income assets are producing very little yields in the current rock-bottom interest rate environment, income-focused investors are literally left with very few investment options. However, master limited partnerships (MLPs) represent an attractive investment option for such investors in the current environment.
MLPs in Focus
Not only do MLPs provide high yields, these also produce relatively stable cash flows and have solid growth potential. This is especially true as the majority of the MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products under long-term contracts. Due to the long-term nature of these contracts, they provide relatively consistent and predictable cash flows.
Moreover, most MLPs reap tax benefits by avoiding corporate income tax at both state and federal levels. Thus they are able to pay out most of their earnings to unit holders.
Also, MLPs provide diversification benefits to ones portfolio as these have very low correlation with other asset classes including equities and commodities (read:3 MLP ETFs for Excellent Income and Growth).
Like other high yielding products, MLPs also react negatively to a rise in interest rates, but research has shown that over a longer time frame, there has been no material correlation between changes in interest rates, as measured by the 10-year U.S. Treasury rate, and MLP yields, as measured by the Alerian MLP Index.
As such, MLPs look like a better choice in the current market slump. Fortunately, there are a number of ETFs/ETNs in the space and investors won’t have trouble in deciding which MLP would be the best to invest in.
Below we have highlighted three popular MLP ETNs, any of which could be good picks if the current market turmoil continues and investors are looking for a low volatility choice in today’s uncertain climate (read: 3 Mega Cap ETFs Beating the Market).
JPMorgan Alerian MLP Index ETN
AMJ is the most popular ETN in the MLP space with about $6.5 billion in assets under management and average trading volume of more than 800,000 shares a day.
The fund tracks the Alerian MLP Index, which provides exposure to the 50 largest companies in the energy MLP sector. Currently, Enterprise Products Partners, Kinder Morgan Energy and Plains All American are the top three holdings in the index with a combined exposure of roughly 30%.
The note charges investors 85 basis points a year in fees and has an attractive yield of 4.4% currently. However, investors should note that the ETNs are subject to maximum issuance limit and this ETN stopped issuing new notes in June 2012. Investors who buy this ETN at a premium to its NAV run the risk of loss in case they sell when the premium is no longer present.