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An Outperformer In Energy Infrastructure

Those that seek income from their portfolios usually face a dilemma. They are by definition normally at the point where they are looking to protect their capital, so are risk-averse, but the interest and other payments that make up securities income are essentially a reward for risk. The trick is in balancing that risk and reward and that can be done in one of two ways.

The first is to moderate both sides by investing entirely in middle income producing, moderately risky instruments. The second is to average within your holdings, owning some high-yielding but risky things, and some with lower yield but a greater degree of safety. Those that take the second approach may want to consider the InfraCap MLP ETF (AMZA) as an element of the risky but high-yielding part of their portfolio.

AMZA is a unique animal. It is an actively managed ETF that employs some leverage. Both of those things increase costs, resulting in an expense ratio of 2.4%. That would be high for a traditional mutual fund, but for an ETF it is even more so. As if that isn’t enough to put you off, the one-year chart looks like this…

Tillier

Before you conclude that I have lost my mind though, consider this. That chart shows a 13.2% 1-year loss, but during that time distributions have totaled over 15% and AMZA has outperformed its peers throughout its existence. Over the last three months, for example, the fund has returned 23.6% versus a category average of -1.4%.

Still, the one-year total return of 4.5 % doesn’t look too hot, but there are reasons to believe that the declines in the ETF’s price will at least slow down over the coming months, if not actually reverse, and if that is the case the yield looks very tempting.

Being leveraged and deriving most of its value from its yield, AMZA is very sensitive to interest rates. Increases in rates decrease the relative value of the payouts and increase the cost of borrowing to leverage, so they are a double whammy. In that context, the big losses last year, as the Fed was increasing rates, make sense, but so does the bounce since the end of 2018. That is when the Fed changed tack somewhat, indicating minimal rate hikes this year.

Treasuries have responded, and the inverted yield curve that we now see suggests that not only are hikes just about over, but also that a cut before too long is now expected. Donald Trump has recently stepped up his pressure on the Fed in that direction and has begun appointing candidates to the Fed board who agree with his take. I am not sure that will be enough to reverse policy, but it certainly makes a pause look likely.

As a fund of MLPs, AMZA is also sensitive to oil prices. So far this year there has been a strong rebound in crude which has helped boost that three-month total return. There is no reason to believe that that will reverse due to supply conditions, but there is a risk on the demand side. The thing to consider though, is that if there is demand weakness it would be down to a general slowdown. Everything would get hit, and in that scenario a yield of over 15% provides a nice cushion.

I am not advocating that you sell everything you currently own and jump into AMZA. Even given the potential positives, it is far too risky for that. If, however, you are trying to generate income from your holdings and are depressed to see interest rates back to close to their lows, you may want to consider a small holding to boost your overall yield.

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