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Stock market volatility recently exploded to its highest level in four years. Therefore, with an 8.1% yield and an extremely low beta, the Alerian MLP ETF (AMLP) looks very attractive in this market environment. It’s likely a great choice for investors who are looking for stable, income-producing investments that can help them ride out the storm while building their income.
I’m bullish on this $8.6 billion ETF based on its significant dividend yield, its stability amid a whipsawing market backdrop, and the fact that it gives investors exposure to a variety of top energy infrastructure MLPs (Master Limited Partnerships) without the hassle of dealing with the K-1s that these types of investments often come with.
What Is the AMLP ETF’s Strategy?
According to the fund’s sponsor, AMLP “provides exposure to energy infrastructure companies via a portfolio of Master Limited Partnerships (MLPs).” These MLPs “earn the majority of their cash flow from midstream activities.”
In case you are not familiar with these types of businesses, they are typically oil and gas pipelines that charge energy companies a fee for moving oil and gas through their pipelines. They can also include energy storage facilities and processing plants.
Many investors like these stocks because while they are part of the Energy sector, their business models can be compared to a toll road in that they charge a flat fee for moving oil and gas. Thus, they aren’t as affected by the ebbs and flows of the underlying commodity prices as traditional Energy stocks are.
These pipelines and storage facilities are real, hard assets that require significant time and investment to build, which makes them an attractive way to defend against inflation in the long term.
Furthermore, these pipelines and other infrastructure providers play a vital role in connecting U.S. energy producers with domestic and international consumers, making them a crucial part of the domestic and global economy.
These types of slow and steady stocks may not usually offer massive moves to the upside in terms of capital appreciation, but these dividend stocks are primarily known for their high yields and are prized by many income investors for this reason.
However, as MLPs, many come with K-1s, which can become a major headache for investors at tax time and make them ill-suited for tax-advantaged accounts like individual retirement accounts (IRAs).
However, that’s part of AMLP’s appeal. It gives you exposure to these companies without the burden of a K-1, alleviating this added complexity for investors.
Major Dividend Yield
AMLP’s yield of 8.1% looks especially attractive in the current volatile market environment, allowing investors to lock in significant income with lower volatility than the broader market (more on this in the next section).
A yield of 8.1% is easily more than five times what the S&P 500 (SPX) offers (as the index currently yields 1.4%). Not only that, but as bond prices have rallied, it’s now also just over double the 3.9% yield offered by 10-year treasuries. And with most observers forecasting that interest rates will be at least somewhat lower in the near future, AMLP’s 8.1% yield will look even more attractive on a relative basis.
Beta Play
AMLP has an extremely low beta of just 0.5. This means that it is only half as volatile as the broader market. That’s incredibly attractive to investors looking to ride out the volatility in an environment where the VIX (volatility index) recently hit its highest level since 2020.
Concentrated Holdings
One important thing readers should note about AMLP is that unlike many ETFs nowadays, it is not particularly diversified.
The fund holds just 14 stocks, and its top 10 holdings make up 97.1% of assets, so this is an extremely concentrated ETF. Its top holding, Plains All American (PAA), makes up 13.2% of the fund.
Below, you’ll find an overview of AMLP’s top 10 holdings using TipRanks’ holdings tool.
However, I would make the case that AMLP offers investors diversification in a different way. For readers who are interested in investing in MLPs and energy infrastructure companies in general, AMLP is a useful tool in that it gives you exposure to a dozen of the major players in the space without having to pick one. This can help to protect investors from company-specific risks like operational risks that could arise from investing in an individual MLP.
How Much Does AMLP Charge?
The primary drawback of investing in AMLP is that at 0.85%, it comes with a fairly high expense ratio. This expense ratio means that an investor putting $10,000 into the fund will pay $85 in fees on an annual basis.
The fund does offer investors exposure to the world of MLPs without the hassle of K1s and produces an attractive and steady stream of income, so many investors may feel that the fee is worth the price of admission. However, this is an important factor for investors to consider when making an investment decision.
Is AMLP Stock a Buy, According to Analysts?
Turning to Wall Street, AMLP earns a Hold consensus rating based on nine Buys, five Holds, and two Sell ratings assigned in the past three months. The average AMLP stock price target of $54 implies 20.9% upside potential from current levels.
Outperform-Equivalent Rating
Wall Street analysts view AMLP favorably, and it also receives high marks from TipRanks’ Smart Score system.
The Smart Score is a quantitative stock scoring system created by TipRanks. It gives stocks a score from one to 10, based on eight key market factors. Scores of 8, 9, or 10 are considered equivalent to an Outperform rating. The score is data-driven and does not involve any human intervention. AMLP earns an impressive Outperform-equivalent ETF Smart Score of 9 out of 10.
Well-Suited for Today’s Market
I’m bullish on AMLP because it offers a significant 8.1% yield while exposing investors to considerably lower volatility than the broader market, which is especially attractive as the market whipsaws back and forth.
I also like the fact that AMLP gives investors access to many of the benefits of investing in MLPs without the drawback of dealing with K-1s. Lastly, while the fund is not particularly diversified, it is advantageous as it gives investors exposure to a variety of top pipeline and energy infrastructure stocks, alleviating single-stock operational risks and deriving income from a variety of sources.
Disclosure