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ETF Gurus Look to MLPs Despite Oil Drop

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Finding yields from some of the more traditional fixed income asset classes can prove to be challenging, especially at a time when interest rates are widely expected to rise.

During Schwab’s Every Third Friday media call, Bruno del Ama of Global X and Michael Iachini of Charles Schwab discussed some ETF strategies that investors might want to consider if they’re looking to generate incomes outside of bonds or bond funds.

“For some time now, it’s been pretty difficult for investors to generate income from traditional fixed income asset classes,” del Ama, CEO of Global X, said. “Really complicating matters now is the threat of increasing interest rates and of course any meaningful increase in interest rates will cause the value … of low-yield and fixed income securities to go down.”

Del Ama had a few ideas on how some different ETF structures and asset classes could help investors in a rising-rate environment.

“We do think there are some real assets that can help investors position themselves for the current environment,” he said.

Del Ama eyes both real estate and master limited partnerships favorably.

“Typically within the real asset space, the one asset class that investors use pretty broadly in portfolios … is real estate investment trusts and other types of real estate,” del Ama said. “One asset class that investors have been focusing on more recently and really an asset class that has only emerged in the last decade or so is master limited partnerships, or MLPs.”

For investors considering alternative income strategies, and MLPs specifically, Iachini, managing director of mutual fund and ETF research at Charles Schwab Investment Advisory, warned to keep the risks associated with these strategies in mind.

“There are certain risks that are specific to these a little-more-exotic products compared to traditional stocks and bonds,” he said. Adding, “that [doesn’t] mean investors have to avoid them, just need to know what they’re getting into.”

Iachini warned of the energy exposure risk related to MLPs.

“You’re definitely going to get a lot of energy exposure with MLPs,” he said. “Although they have some different characteristics and depending on which type of MLP you’re investing in, you might or might not be as exposed as much to change in energy prices.”

The other thing Iachini says to keep in mind, especially with MLPs, is taxes can be a bit complicated.

“When you look at ETFs or mutual funds that give you MLP exposure, oftentimes they’re structured as the corporations, which is nice from a tax perspective in that it’s simple,” he said. “They’re taxed just like any other company would be, but investors need to understand that in those situations the MLP ETF itself would have already paid taxes, so you’re getting an after-tax return.”

Specifically within the MLP space, del Ama likes infrastructure midstream MLPs.

“What we’re focused on and where we see the opportunity is in infrastructure midstream MLPs … [for firms] that store, transport and process oil and natural gas,” he said.

According to del Ama, infrastructure MLPs are “much more insulated” from commodity price movements, as oil prices continue to drop.

“If you look at what’s actually happening to the fundamentals and the economics of the infrastructure MLPs, they’ve actually maintained or increased their distributions in the last year despite these environments [and] prove how much more insulated they are from what happens to actual energy prices,” del Ama said.

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