"New-to-Market" - AMZA

Welcome to our new featured Blog Series entitled: "New-to-Market"

This periodic series of posts will highlight select ETFs that have recently gone public and reflect those strategies currently most in demand by investors. Our goal is to bring you timely insights on the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this new series.*

The zero interest rate policy era may have been tough on investors seeking income, but it has been a blessing to Master Limited Partnerships (MLPs) as the number of publicly-traded mid-stream MLPs has more than doubled since 2008 with investors trading earnings growth potential for stable income and no pesky K-1.  In recent years, you have probably reviewed products with “equity income” or “energy infrastructure” somewhere in the name, helping fuel this explosive growth in the sector.

The MLP space is currently dominated by two funds; the Alerian MLP ETF (AMLP) with $9.05 billion and benchmarked to the Alerian MLP Infrastructure Index while the second largest fund is the JPMorgan Alerian MLP Index ETN (AMJ) with $5.6 billion and benchmarked to the Alerian MLP Index.  Both benchmarks are market-cap weighted and adjusted for free-float, but like many benchmarks in the natural resources universe, the number of available companies to build an index around is fairly small, leading the Infrastructure Index to have 25 constituents while the MLP Index has 50 and with a large degree of cross-holdings between the two funds.

For those investors looking for the higher yields in MLPs but not willing to sacrifice all the possible upside as the energy sector looks to retrace a 26% sell-off since last June might want to consider the first actively managed MLP fund, the InfraCap MLP ETF (AMZA.)  Launched last October and targeting an 8% distribution yield from MLP dividends and option income, the fund is smaller than its larger rivals AMJ and AMLP but unlike them, the fund is not based on a market-cap weighted index and can actively rotate among the available MLP universe to find the best opportunities and reduce the likelihood of highly correlated performance.  As an example, both AMJ and AMLP have a large allocation to Enterprise Product Partners, LP (EPD) at 17.8% and 10.1% respectively while AMZA currently maintains an allocation of 8.7%.  Other distinguishing features of the fund include the ability to invest directly in the general partner/plan sponsor, which could lead to larger capital gains while reducing some of the income potential and they can also employ leverage to magnify returns. 

That ability to invest anywhere within the midstream universe while employing leverage isn’t without its risks however.  During the great energy stock rout last year, the income producing abilities of the MLP space helped cushion their downside compared to the broader energy sector, but from AMZA’s inception on October 2^nd to the energy sector low on January 14^th, larger rival AMLP was 11.79% while AMZA underperformed the XLE, down 19.55% compared to its 16.35%.  But as investors start to return to the sector, the shoe has been on the other foot as MLPs have outperformed the broader market, with AMLP up 5.76% from January 15^th through yesterday, XLE up 8.39% and newcomer AMZA, currently long 120%, up over 11.59% compared to the S&P 500’s 1.93% gain.

For those investors willing to trade some income for great upside opportunity when oil stocks begin to rise, AMZA could be a focus fund to watch.

Thank you for reading ETFG Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.