Advisors are using energy infrastructure ETFs in several different ways in client portfolios.
While energy infrastructure is a space that’s been best-known for its generous income, it offers other portfolio benefits as well due to the unique characteristics of the asset class.
Within a portfolio allocation, energy infrastructure can fill a few different roles. It can be used to enhance yield in an income sleeve, or as part of a real assets allocation to help with inflation mitigation. Additionally, it can serve as a portfolio diversifier as EI companies have a lower correlation to other asset classes.
Income and Inflation Mitigation
Midstream offers compelling yields relative to other income producing asset classes such as REITs or utilities.
The Alerian MLP ETF’s (AMLP) underlying index was yielding 7.7% while the Alerian Energy Infrastructure ETF’s (ENFR) underlying index was yielding 6.4% as of August 24.
AMLP is a composite of energy infrastructure MLPs that earn most of their cash flow from midstream activities. Conversely, ENFR comprises 25% MLPs and 75% U.S. and Canadian C-corps, providing more diversified exposure than AMLP. However, as ENFR includes more C-corps than AMLP, it also tends to have a lower yield.
AMLP’s underlying index is yielding right in line with its 10-year average. ENFR’s underlying index is yielding above its 10-year average of about 5.8%. To put those figures into perspective, the 10-year average yield for corporate bonds is around 2.5%.
See more: “Is Your Income Stream Too Dependent on the Fed?”
While MLPs or midstream companies aren’t intended to be used as bond substitutes, energy infrastructure can be a nice complement to an income portfolio. Midstream yields are not sensitive to the Fed’s actions or interest rate movement, meaning AMLP and ENFR have the potential to provide attractive income throughout various interest rate environments.
MLPs and midstream companies generally have fee-based business models, lending to more stable operating cash flows. Energy infrastructure can provide a steady income stream as well as help with inflation mitigation, as many infrastructure companies have inflation escalators built into their contracts.
See more: “2022’s Inflation Has Silver Lining for Midstream/MLPs”
Energy infrastructure can also serve as a portfolio diversifier as it has a lower correlation to other asset classes including bonds and utilities.
In the case of MLPs, many major market indexes do not include MLPs in their universe of constituents. Thus, investors that have exposure to an ETF that tracks a core equity index likely do not have any exposure to MLPs.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are 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 and ENFR.
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