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Energy Stocks Can Extend Bullish Ways

The energy sector has been one of the more solid nontechnology performers this year. The group often languishes in the summer months. But some market observers see more upside coming for energy stocks.

Should that prediction prove accurate, a variety of exchange traded funds stand to benefit, including the Alerian MLP ETF (AMLP). It’s the largest ETF dedicated to master limited partnerships (MLPs), and is already beating the S&P 500 Energy Index by 80 basis points year to date. That indicates the fund could be well-positioned for more extended upside energy equities.

The $8.37 billion AMLP turns 14 years old in August. One of its long-running selling points is efficient access to high-yielding MLPs. AMLP’s trailing 12-month distribution yield of 7.70% is well in excess of the broader energy sector. It could attract investors seeking income as the Federal Reserve appears unlikely to pare interest rates over the near term.

Other Catalysts for AMLP, Energy Stocks

Some market observers believe investors’ desire to diversify portions of their portfolios in an effort to reduce dependence on mega-cap growth AI-related stocks could boost the energy sector in the months ahead.

Some market participants might needing more convincing about energy’s upside potential. Strong demand trends could be supportive of the group climbing higher in the back half of 2024.

“Energy stocks are benefiting from a resilient economy which has, in combination with select supply constraints, supported the broader commodity complex. Year-to-date, the S&P GSCI Commodity Index is up more than 10%. Depending on the universe, crude oil is up roughly 10%, with other parts of the energy complex, notably gasoline, posting solid double-digit returns,” according to BlackRock.

Energy Sector’s Valuations Attractive

Add inflation and valuation to the list of possible catalysts for AMLP. Although the energy sector has performed admirably in recent years, the group sports attractive valuations. That indicates investors aren’t paying up to access AMLP’s perks.

Likewise, if inflation suddenly surprises to the upside, AMLP and the broader energy patch could benefit. That’s because the sector has a penchant for trending higher when inflation does.

“Recent patterns conform to longer-term trends. Historically, the relative performance of the energy sector has been positively correlated with the rate of inflation. Going back to 1995, whenever inflation has been below 3% year-over-year, the S&P 500 Energy sector has generally underperformed, trailing the market by an average of approximately 0.40%/month. However, in periods when inflation has been 3% or greater, energy stocks post positive average returns of around 0.90%/month,” concluded BlackRock.

VettaFi LLC (“VettaFi”) is the index provider for AMLP, for which it receives an index licensing fee. However, AMLP  is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP.

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