MLP ETPs: Bruised, Battered . . . And Beckoning?

The most popular MLP ETF remains the Alerian MLP ETF (AMLP), which tracks an underlying index of energy storage, transmission and refining MLPs. The fund, with roughly $7.9 billion in assets, takes a cap-weighted approach and tends to focus on the most stable firms in the MLP universe. As a result, its roughly 14 percent year-to-date drop isn’t as severe as the pullbacks seen at most other energy MLPs. The pullback has pushed its distribution yield above 8 percent. The gross expense ratio is 5.4 percent. 
 
The UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI) is a popular ETN choice, with more than $2 billion in assets under management. The note tracks an underlying index which represents the largest and most stable storage and distribution MLPs, most of which are likely to at least maintain the current level of dividends. 
 
That focus hasn’t helped this ETN to escape the industry carnage, as it has fallen roughly 21 percent so far this year. The ETN is on pace for $1.90 per unit in distributions this year, which translates into a 5.9 percent distribution yield, the highest it has been in a number of years. The 0.85 percent net expense ratio is in line with the peer group average.
 
For more intrepid investors, a case can be made for the riskier MLP small caps, which have been among the hardest hit, and now offer the highest yields. The emerging valuation gap between the larger and smaller firms is likely to trigger M&A activity, notes Underhill from Capital Innovations. “The smaller players often own very attractive assets, but may not have the balance sheets to go it alone,” he says. 
 
The Global X Junior MLP ETF (MLPJ) may be the best way to play this theme. It has dropped about 28 percent thus far in 2015, making it the poorest performing MLP ETF in the entire category. The Global X fund’s current annualized distribution stands at $1.08 per unit, equating to a 10.9 percent yield. That high yield suggests a near-term potential for a dividend reduction, but the longer-term prospects for the firms in this fund remain bright, and current valuations are at cyclical lows.
 
Have the MLPs indeed hit bottom? Not if oil prices slide to $30 a barrel, as some analysts predict. But futures contracts for 2017 and 2018 suggest that oil prices will eventually move back above $50, by which time these MLPs are likely to be trading back at much higher levels. It’s not a risk-free trade, but the potential reward looks ample.