Time To Consider MLP ETFs?

In spite of hailing from the energy space, MLPs managed to ride out the oil price carnage last

year thanks to their relatively low correlation with the underlying commodity and the U.S.

shale oil boom.

However, things have gradually become difficult for MLPs, which have lost their winning

streak this year and are incurring losses.

Almost all MLP ETF are deep in red with Yorkville High Income MLP ETF

(NYSEARCA:YMLP) having shed the most (about 25%).

With oil prices yet to show any sign of definite recovery, and hinting at further losses once

the Fed opts for policy normalization, the MLP space might find it tough to keep its head

above water.

Moreover, MLPs often operate pipelines or similar energy infrastructure that makes it an

interest-rate sensitive sector.

This group does not pay taxes at the entity level and hence must pay out most of their income

(more than 90%) in the form of dividends.

Investors in search of higher income levels from the conventional bond space throng these

products.

In short, the space is especially popular for its payout.

Now, with several MLPs starting to reduce distribution to cope with the energy weakness,

the space seems to be losing its lure.

Linn Energy, LLC (LINE) and Memorial Production Partners LP (MEMP) are some of the

companies resorting to distribution deferral or reduction.

Notably, MEMP has around 3.6% weight in Junior MLP ETF (NYSEARCA:MLPJ) which

makes the fund feel a little burdened.

Though this is not an industry-wide trend as there still are MLP ETFs with double-digit

annual yield (offered by YMLP, Cushing MLP High Income Index ETN

(NYSEARCA:MLPY) and Zacks MLP High Income Shares (ZMLP)), the start of

distribution cut was enough to shake investors to have faith on MLPs and the related ETFs

for the dividend requirement.

To add to this, the Fed is preparing for a rate hike sometime this year as the U.S. economy is

gathering steam.

This will deal yet another blow to MLP ETFs’ income glory.

In recent times, interest rates started to show an uptrend which in turn sent the bond yields

higher causing MLPs to fall out of yield-seeking investors’ favor.