Many investors are trying to beat inflation, and the 8%-yielding Alerian MLP ETF (NYSEARCA:AMLP) can help them do just that. Not only is this north of the rate of inflation (currently running at 6%), it’s about five times the average yield for the S&P 500 and more than double what investors can earn from 10-year treasuries. Therefore, let’s take a look at this ETF and examine if it’s a good way to add yield to a portfolio.
What is the Alerian MLP ETF?
AMLP is a $6.45 billion ETF from Alps Funds. AMLP seeks investment results that correspond to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index (AMZI), before fees and expenses. The fund invests in MLPs that earn the majority of their cash flow from midstream activities within the energy industry.
What are MLPs?
Master limited partnerships, commonly referred to as MLPs, are publicly-traded entities in the United States that are taxed as a partnership, and income from the MLP flows through to investors. These vehicles must obtain at least 90% of their revenue from activities such as the production, processing, storage, or transportation of natural resources such as oil, natural gas, or minerals.
When it comes to AMLP, most of these MLPs are pipeline companies engaged in the storage and transport of oil and natural gas. The investment appeal of these companies is that they essentially serve as a “toll road” for the energy industry, collecting volume-based fees to use their pipelines to move oil or to store it. This makes MLPs experience lower volatility and less exposure to the price of the underlying commodity than a typical oil company. This is why MLPs are often reliable dividend stocks.
One downside to investing in MLPs is that because of their tax structure, investors must file a K-1 with their taxes, which can become a headache for retail investors because they can generate unrelated business taxable income (UBTI) and also add complexity to the tax process.
Here’s where the appeal of AMLP comes in. It offers you the same high yield as a typical MLP but without the headache of a K-1 since it is structured as a 1099 for taxes. Furthermore, AMLP pays qualified dividends, and a portion of these distributions is tax-deferred.
AMLP’s Top Holdings
As you can likely guess from the discussion above, AMLP invests primarily in energy MLPs. This is a very concentrated fund with little diversification — having 17 stocks — and its top 10 holdings make up over 90% of the fund.
The stocks MPLX LP, Enterprise Product Partners, Magellan Midstream Partners, Plains All American, Energy Transfer, and Western Midstream Partners, all account for over 10% of the ETF’s assets.
The top positions, Energy Transfer, Enterprise Products Partners, Magellan Midstream Partners, Western Midstream Partners, and EnLink Midstream, all feature Tipranks Smart Scores of 9 out of 10 or higher.
The Smart Score is TipRank’s proprietary quantitative stock scoring system that evaluates stocks on eight different market factors, such as analyst ratings, corporate insider transactions, hedge fund activity, and more. Stocks with a Smart Score of 8 or above receive “Outperform” ratings.
What is the Price Target for AMLP Stock?
Wall Street analysts are relatively bullish on AMLP, giving the ETF a Moderate Buy consensus rating. The average AMLP stock price target of $46.07 implies upside potential of ~20%.
Of the 86 analyst ratings on AMLP, 65.12% are Buys, 27.91% are Holds, and 6.98% are Sell ratings.
TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performances of the underlying assets. By using the Analyst Forecast tool, investors can see the consensus price target and rating for an ETF, as well as the highest and lowest price targets.
TipRanks calculates a weighted average based on the combination of all the ETFs’ holdings. The average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF and adding them all up.
Additionally, AMLP has an ETF smart score of 8 out of 10, giving it an Outperform rating. Further, blogger sentiment on AMLP is bullish, and crowd wisdom is positive, but hedge fund involvement is decreasing.
AMLP’s Past Performance
Last year, thanks to surging energy prices, AMLP trounced the broader market with a gain of 25.3%, while the S&P 500 lost nearly 20% for the year. This year, however, AMLP is down about 1% year-to-date versus a 1.4% gain for the S&P 500.
Looking out over a longer time frame, the bigger picture doesn’t look quite as rosy. Adjusted for dividends, AMLP has still underperformed the S&P 500 with a gain of 16% over the past five years versus superior returns of 53% for the broader market.
Investor Takeaway
For investors looking to generate some income or to add some yield to their portfolios in order to beat inflation, AMLP is a useful option for doing just that. Its primary appeal is that it gives investors the benefits of owning high-yield MLPs but removes the need for a burdensome K-1 at tax time.
AMLP has performed well over the past year or so, thanks to elevated oil prices, but it’s important to be aware that the ETF has underperformed the broader market by a significant margin over a longer time frame. It’s also not a very diverse ETF, with the top 10 holdings making up over 90% of assets.
Another note of caution about AMLP is that while it has increased its dividend payment from 2021 to 2022 and should be on track to do so again in 2023, the ETF’s annual payout declined for several years in a row before that. One final negative about AMLP is that its expense ratio of 0.87% is relatively high, and these fees can add up over time.
Overall, though, this can be a useful ETF to boost the yield of a well-rounded portfolio.
