MLPA: This Niche ETF Stands Out In The Current Market

The Global X MLP ETF (NYSEARCA:MLPA) has a lot going for it. It focuses on a niche sector (energy pipeline businesses) and happens to produce a rarity in today’s market: a dividend yield that exceeds the yield of U.S. Treasury bills. This is a well-constructed ETF. And, while it is tied to the notoriously volatile energy sector, its appeal is growing relative to more traditional equity market segments. I rate it a hold for now, but I’m tracking it closely.

Strategy

MLPA is an index ETF that tracks the Solactive MLP Infrastructure Index by full replication. MLPA invests in companies that focus on energy logistics, specifically the ones that are MLPs (master limited partnerships). The selection criteria of the index also require any individual stock to have a free-float market cap of more than $2B and an average daily trading volume (average over the past three months) of more than $2.5M. These criteria produce an ETF that aims to invest in big and liquid stocks in the energy sector. This is an ETF backed by the firm Global X, which has distinguished itself as an innovative niche-product producer in the ETF space.

Holding Analysis

This is a niche ETF with 100% of its assets invested in the energy sector. There is no diversification by sector or country. The fund has only about 21 holdings and more than 35% is concentrated in the top three, as shown below. MLPA includes companies that have been in the gas and oil pipeline for decades. This gives those long-tenured businesses a strong hold over the MLP market from a competitive standpoint.

Strengths

The dividend yield of this fund caught my eye. It is currently at 5% while the S&P 500 offers only 2%, and the portfolio’s dividend is forecast to rise to 7%. Even if MLPA’s payout rises, but not nearly to that 7% level, the high yield, mature industry, and quarterly dividend payout offered by this ETF could be a terrific opportunity for both the short and longer terms.

This is because dividends are beneficial for investors only if they stay long enough to capture the benefits of the payout. Unlike bonds, ETFs and stocks pay their full dividend on a single day each time they do pay. That high dividend payout is even more valuable when investors consider that as an ETF investing in MLPs, the distributions are considered a return of capital. I am not a tax expert and do not aim to provide any tax advice here, so I encourage investors to learn more about the tax implications of MLPs and also of the ETFs that invest in them. The bottom line for me as a potential investor in MLPA is that this ETF provides a premium level of yield in a relatively predictable business.

Weaknesses

About three-quarters of MLPA’s exposure is to companies classified as smaller than large cap. While this makes MLPA a potentially riskier ETF than one that focuses on the oil giants, this comes with the territory. Most MLPs are not gigantic companies from a capitalization perspective. MLPA’s five-year beta of 1.49 bears that out. This ETF has a limited ability to shield itself from bear markets that include heavy selling and downtrends in the energy sector.

This vulnerability has been realized in the past. MLPA’s track record includes peak-to-trough declines of 53% in 2016 and an astonishing 79% in 2020. This has dragged down the long-term return of this ETF, especially vs. the S&P 500. As shown in the performance chart below, over the past 10 years, MLPA has trailed the S&P 500 by a striking 200%. Or, to put it in different terms, it has produced just 1% of the S&P 500’s total return over that time period.

Opportunities

However, the stock market environment of today does not resemble that of the past decade. Nor does it closely resemble that of any past period. So when I look at any ETF today, I do so with a relatively “clean slate.”

When I do that with MLPA and the energy MLP industry in general, I see a lot of encouraging signs. This ETF focuses on businesses from the oil pipeline industry. That means it’s not responsible for drilling for oil, nor is it involved in distributing it for final sales, such as at a gas station. These businesses are primarily delivery systems. It’s sort of like being the railroad equivalent of transporting oil and gas from where it’s found to where it will be used.

My analysis of current economic conditions leaves me with an optimistic, yet realistic, outlook for MLPA. Even though inflation averaged 6.5% during 2022, which is above average, the demand for the energy sector has not crashed. To meet the demand, there has been increased supply from domestic sources as well as OPEC. This usually pans out well for this type of logistics-oriented industry, as increased production of fuel flows through their pipelines. This ETF has a favorable economic condition and is possibly at its prime, with demand increasing for the invested sector more than ever.

The technical (price chart) condition of MLPA is not spectacular, but it is fairly stable. As the chart below shows, this ETF just bounced off its 50-day exponential moving average (EMA) and sits slightly above it as of this writing. That 50-day EMA has been rising steadily since last July.

As this is one of the few industries with a dividend yield above that of Treasury bills, any extended period of price stability leaves investors in an excellent total return scenario. In 2023, this might be one of the most sought-after situations by investors, who are learning that traditional stock and bond investing is riskier than they’ve seen in a long time.

Threats

The main threat to MLPA will probably always be the fact that it is tied directly to the volatile energy sector. Even though pipeline stocks should not be as volatile as energy producers and refiners, the stock market has a history of treating them similarly.

In addition, as alluded to above, the tax structure of MLPA is a bit more complex than other ETFs. In a situation where the fund must pay higher taxes on income derived from MLPs, the amount passed on to the investors will shrink. Understanding the tax structure and its implications is a necessity before putting money in this fund. Below is a snippet from a primer on MLP taxation, which I recommend reading through on the ETF website. As noted earlier, I am not a tax advisor, and this part of the MLPA story should be interpreted by investors themselves before considering this ETF.

Conclusions

ETF Quality Opinion

There is a lot to like about this ETF. It is an intelligently constructed fund that thoughtfully targets a niche that has a history of delivering some of the highest yields in the stock market. Furthermore, it does so without resorting to excessive leverage. MLPA’s strict selection, dividend rate, and reasonable expense ratio are appealing to me. Include the strong liquidity, and it all adds up to an ETF I will place on my watchlist going forward.

ETF Investment Opinion

Despite the great potential and everything moving in favor of this fund, my risk aversion keeps me from rating it a buy. I’d want a bit more of a price and valuation cushion, as well as more evidence that the energy industry is not on the verge of another high-volatility/high-drawdown period, before committing capital. For these reasons, I currently rate MLPA a hold.