Energy MLP ETFs a High Yield Sweet Spot

Following the latest employment data from last Friday, the S&P 500 and Nasdaq traded to new all-time highs. The jobs report went the market’s way in terms of rate cut expectations, but also stoked some concerns about lower earnings growth in the event that softening labor market conditions translate into lower consumer spending.

Private sector payrolls were up just 136,000, average hourly earnings growth decelerated to 3.9% (from 4.1%) on a year-over-year basis, the unemployment rate pushed up to 4.1% from 4.0% and persons unemployed for 27 weeks or more accounted for 22.2% of the unemployed versus 20.7% in May, suggesting it has gotten harder to find a new job quickly.

While there is a 92% probability the Fed stands pat on a rate cut at the July 31 Federal Open Market Committee (FOMC) meeting, the odds of a rate cut in September have jumped to 72% from 58% a week ago. Bond market sentiment is starting to believe the Fed has the growing evidence it needs to begin easing. And yet, the September 18 FOMC meeting is not exactly just around the corner, and much can happen to derail this hopeful rate cut expectation.

While the job market is clearly providing some slack the Fed has been targeting, the energy and commodity markets are not. As of July 5, the price of WTI crude was just over $83/bbl heading into the heart of summer travel season. At the beginning of 2024, the price of crude was around $71/bbl.

The extended production cuts implemented by OPEC+ amount to a reduction of 2.2 million barrels per day. Attacks on merchant ships in the Red Sea that have disrupted supply and forced tankers to take longer trade routes, Ukrainian attacks on Russia’s refining infrastructure and a healthy U.S. economy driving strong demand are all contributing to the recent rise in oil prices.

As a result, Bank of America (BofA) energy analysts predict a global oil deficit of up to 450,000 barrels per day during the third quarter that could push oil prices as high as $95 a barrel as robust demand hits up against shrinking supply. BofA is not alone in its assessment of market conditions. Back in late March, the International Energy Agency predicted worldwide oil supplies could fall short of demand by 300,000 barrels per day this year where oil would trade at $83/bbl.

Adding to the risk of household inflation remaining stubbornly high, the broader commodities markets are also seeing prices elevated. The Commodities Research Bureau Index (CRB) is a representative indicator that measures the aggregate price of various commodity sectors, comprising of 19 commodities with the following allocations:

• Energy (39%)
• Agriculture (41%)
• Precious Metals (7%)
• Industrial Metals (13%)

Although not included in the Core CPI data, the year-over-year price of eggs is up 119%, poultry by 28%, potatoes by 33%, butter by 42%, tea by 22%, cocoa by 138%, coffee by 42%, orange juice by 52%, milk by 41%, cheese by 27% and gasoline by 5%. Within headline CPI, food (13.4%) and energy (7.0%) account for only 20% of the total weighing, with shelter accounting for 36.2%. Core CPI excludes food and energy altogether. To say that inflation is coming down meaningfully doesn’t line up with the chart of the CRB index that is on the verge of breaking out to a new five-year high.

The Bureau of Labor Statistics (BLS) and the Council of Economic Advisors (CEA) that serves the Office of the President may want to interpret the recent data as disinflationary, but it is my view that they are cherry picking and failing to lay out the broader range of inflationary pressures and the direct impact it is having on the majority of Americans. A recent survey by Pew Research showed that inflation topped the list of all problems facing the nation, with affordable healthcare not far behind.

Investors that are of the view that “real inflation” will indeed be higher for longer may want to consider the domestic energy infrastructure sector as a way to own U.S. energy assets that pay inflation beating yields. A simple solution to owning pipelines, processing plants and storage facilities that serve the oil, natural gas and liquids markets is to invest in energy Master Limited Partnership (MLP) ETFs that own a basket of the leading MLPs and also convert the K-1 income received into 1099 income that is paid out to shareholders.

The largest of these energy infrastructure ETFs is the Alerian MLP ETF (AMLP) that has $8.8 billion in assets, pays a current yield of $7.33% on a quarterly basis and has returned 18.9% year to date. For investors that want monthly income, consider the InfraCap MLP ETF (AMZA) that has $405 million in assets, pays a current yield of 7.24% and has returned 23.4% year to date.

Both ETFs have bullish charts, reflecting the bullish fundamentals and reliable distribution coverage. So, while the government is telling us they are winning the battle against inflation, the kitchen table hard data for most Americans would argue otherwise. In the meantime, some high-yield energy infrastructure-based income might be just the ticket to help manage through a long hot summer of higher prices for just about everything.

For more information about energy MLP ETFs and other high yield asset classes that are timely investments, go to my website at www.bryanperryinvesting.com and put the power of high yield investing to work in your portfolio today!