Investors knew that the results of the election would bode well for some asset classes and be a hindrance for others, and it appears that one of the losers has come out of the weeds. The MLP sector has been stuck in a downward spiral since Barack Obama was announced the winner of his second presidential term. Romney’s policies were largely considered to be more beneficial for big oil and gas with projects like the Keystone XL Pipeline approval, among others [for more MLP news and analysis subscribe to our free newsletter].
But the energy policies of another Obama administration are not what is hampering these investments. The threat of the looming fiscal cliff is instead what has created downward pressure for these products. Currently, one of the most attractive aspects of the MLP industry is the massive yields that these products pay out; in a low-rate and uncertain environment, consistent dividends are crucial. The action, or lack thereof, from congress could shake things up for dividend investors everywhere.
A lack of action will result in capital gains taxes jumping to 40%, a massive leap from the current 15% rate. Of course, this 15% rate is what has allowed many people to minimize their taxes for so long, like the famous “Warren Buffet was taxed less than his secretary” quip. Many have argued that MLPs will see no fundamental change in their taxes or payouts due to their structure, but it is obvious that the market is not so sure [see also 5 Commodity MLPs With Sky High Yields].
Below, we outline some of the most popular MLP ETFs and how they have performed since election day.
- Alerian MLP Index ETN (AMJ): -5.8%
- Alerian MLP ETF (AMLP): -3.6%
- Cushing 30 MLP Index ETN (MLPN): -6.5%
- E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL): -10.9%
If you believe the fiscal cliff is being blown out of proportion, then now may be a great time to buy an MLP product. With natural gas consumption and demand slated to rise in the coming years, these products and their underlying holdings have the potential for some handsome growth as well as hefty distributions.
Disclosure: Long AMJ.