Why non-traditional master limited partnerships are growing (Part 3)
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How could the changes affect MLP exchange-traded funds?
The volatility and make-up of certain master limited partnership exchange-traded funds (MLP ETFs) could be affected by the expansion of the MLP category. As we’ve seen, most MLPs have historically covered midstream energy, which for most companies has meant relatively stable cash flows. The addition of companies operating in more volatile sectors could increase volatility in ETFs whose constituents include those companies. The amount of volatility added depends on individual ETFs. For example, the Alerian MLP ETF itself doesn’t have significant holdings of non-traditional MLP assets. However, note that the mandate of the Alerian MLP ETF is to track the Alerian MLP Index (AMZ), a cap-weighted index of 50 select energy-related MLPs. The AMLP holds names such as refining company Calumet Specialty Products Partners (CLMT) as well as marine shipping company Navios Maritime Holdings (NMM), though note that these make up a very small portion of the AMZ. Meanwhile, the Yorkville High Income MLP ETF (YMLI) includes a plethora of more volatile cash flow MLPs—including E&Ps (exploration and production companies), refiners, and shipping companies—as its mandate is to invest in “high income” MLPs. These MLPs usually are the riskier, more volatile, or smaller cap names. The addition of more cyclical or higher beta MLP names would likely affect the YMLI more than the AMLP, given their different constituents and mandates.
Non-traditional MLPs have grown more common over the years, with the relatively recent initial public offerings (IPOs) of a variety of non-midstream names operating in sectors such as refining and oilfield services. Additionally, the MLP universe has also been expanding to cover certain petrochemical operations and could include renewable energy if certain legislation is passed. Some of these non-midstream MLPs may have more cash flow volatility than traditional MLPs, which could result in significantly smaller than expected distributions during hard times—and this negatively affects valuation. This volatility could affect sentiment about investing in the MLP sector. Lastly, this trend could affect the volatility and make-up of MLP ETFs if more non-traditional MLPs add to the indices that the MLP ETFs are to track.