I recently wrote an article, ALPS Alerian MLP ETF: Avoid Being Seduced By The High Yield. The crux of my bearish view on ALPS’ ETF (NYSE: AMLP) is that about 50 percent of the sector weightings were in petroleum pipeline transportation and my outlook is that oil consumption has likely peaked in the U.S. MLPs in the index that engage in petroleum pipeline transportation earn revenues on a fee-for-service basis, and so if the volume of petroleum drops, so will their fees.

Source: Alerian.com. Last Updated: 11/13/20.

My outlook is supported by the British Petroleum (BP) Energy Outlook 2020 says that global oil demand may have already peaked in 2019 and that oil consumption may never recover to the pre-pandemic levels.

Recent data from the EIA show that U.S. petroleum pipeline movements began to decline even before the pandemic with the peak reached in August 2019.

I was asked in the comments to that article for a comparison to the First Trust Energy Infrastructure Fund (NYSE: FIF), the “Fund.” Contrary to the heavy petroleum pipeline weighting in AMLP, FIF has an Electric Power and Transmission weighting of 43.29%. Its Crude Oil Transmission weighting is just 18.12%.

Source: First Trust Energy Infrastructure Fund.

The top constituents of AMLP are listed below and account for about 78% of the weight for the Index. They include the petroleum pipeline transportation companies shown below.

Source: Alerian.com. Last Updated: 11/13/20.

The top holdings of FIF are listed below. They include Public Service Enterprise Group (NYSE: PEG), an electricity producer, for example.

READ ALSO  Antitrust in the digital economy: IGM Forum survey

Source: First Trust Energy Infrastructure Fund.

Looking at the total returns of PEG compared to petroleum pipeline transporters, Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP), over the past five years, PEG had a total return of 75.5 %, whereas EPD’s and MMP’s total returns were 4.5 % and -8.4 %, respectively.

Source: Seeking Alpha.

And so it is not surprising that FIF’s total return of 75.5 % far exceeded the -36.9% total return of AMLP over the past five years.

Source: Seeking Alpha.

Looking forward, the EIA projects that U.S. electric energy will rise steadily through 2050.

Therefore, given the relative weights of the AMLP compared to FIF, I expect FIF to continue to outperform AMLP, as it has over the past ten years.

Source: Seeking Alpha.

In addition to return, results should also include a risk assessment. The risk measurement I find to be most important is “Drawdown from Peak.” What that measures is trough from a high-water mark peak. In this case, the maximum draw for AMLP was 78% whereas the maximum draw for FIF was 62%. Therefore, FIF not only provided a better return, but also less risk (drawdown).

This analysis would not be complete without the statement of the Fund’s Investment Objective/Strategy:

The investment objective of the Fund is to seek a high level of total return with an emphasis on current distributions paid to shareholders. The Fund pursues its objective by investing primarily in securities of companies engaged in the energy infrastructure sector. These companies principally include publicly-traded master limited partnerships (“MLPs”) and limited liability companies taxed as partnerships, MLP affiliates, YieldCos, pipeline companies, utilities and other infrastructure-related companies that derive at least 50% of their revenues from operating, or providing services in support of, infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries (collectively, “Energy Infrastructure Companies”). For purposes of the Fund’s investment objective, total return includes capital appreciation of, and all distributions received from, securities in which the Fund invests, taking into account the varying tax characteristics of such securities. Under normal market conditions, the Fund invests at least 80% of its managed assets (total asset value of the Fund minus the sum of the Fund’s liabilities other than the principal amount of borrowings) in securities of Energy Infrastructure Companies.” – Source: First Trust Energy Infrastructure Fund.

More information about the Fund may be found by clicking his link.

READ ALSO  Foreign Share of US Debt Plunging; Fed Picking Up the Slack

Conclusions

As demonstrated here, not every energy infrastructure fund provides similar results. The sector weightings are critically important. The focus on electricity as compared to petroleum pipeline transportation is likely to result in a major difference in future performance in my opinion. A potential pairs trade for relatively low risk would be long FIF/short AMLP.

Perhaps Alerian will change their sector weightings in the future. If they do, it would worth taking another look.

To guide investors who are interested in profiting from outstanding opportunities in the energy sector, I provide a service on Seeking Alpha’s Marketplace oriented toward individual investors, Boslego Risk Services. A long/short Model portfolio is continuously updated, along with on-going analysis of the oil market.

I am now accepting new members to Boslego Risk Services and invite you to sign-up. There are monthly and annual pricing options as described here. You may also read reviews posted by members here

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com