Equity income strategies remain in high demand in an environment of heightened macro risks. Income investors seeking to enhance income portfolio diversification or increase potential yields shouldn’t overlook midstream.
The uncertain timing around interest rate cuts and the ongoing challenges for the bond market in a high-rate environment left investors looking further afield for income opportunities in the last year. In such an environment, equity income strategies gained in popularity as a means of diversifying income streams. However, income investors should be mindful of enhancing their concentrations when adding equity income strategies.
Investors looking to diversify their equity income beyond traditional exposures would do well to consider midstream master limited partnerships (MLPs). MLPs and midstream exposure provide diversification potential for income portfolios.
Diversify Your Income Portfolio While Enhancing Yield
Midstream offers low long-term correlations to traditional equity income sources such as REITs and utilities alongside notable yields.
Data sourced from Bloomberg as of 6/21/24
The Alerian MLP Infrastructure Index (AMZI) is a composite of energy infrastructure MLPs. These businesses earn most of their cash flow from midstream activities. The index is capped, float-adjusted, and cap-weighted. Meanwhile the Alerian Midstream Energy Index (AMEI) tracks energy infrastructure companies within North America. The index is capped, float-adjusted, and cap-weighted.
AMZI has a 10-year correlation of just 0.48 to REITS, measured by the FTSE NAREIT Real Estate 50 (FNR5). It has an even lower correlation to utilities at 0.28, as measured by the S&P 500 Utilities Index (S5UTIL). AMEI has a 0.56 correlation to REITS and a 0.35 correlation to utilities over the last decade.
Income investors can gain exposure to the diversification and yield benefits of MLPs and midstream through two different funds. The Alerian MLP ETF (AMLP) seeks to track the performance of the Alerian MLP Infrastructure Index (AMZI).
The Alerian Energy Infrastructure ETF (ENFR) aims to track the performance of the Alerian Midstream Energy Select Index (AMEI). The index contains energy infrastructure MLPs and corporations within North America.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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