Here's Why MLP ETFs Are Hot

Master limited partnerships or MLP-based exchange-traded funds (ETFs) have been hovering around a 52-week high lately. Infracap MLP ETF AMZA, Etracs MLP Infrastructure Index ETN MLPB, Alps Alerian MLP ETF AMLP and Global X MLP ETF MLPA are some of the ETFs that have hit a 52-week high lately.The highest year-to-date (YTD) return offered in the space has been by ETRACS Alerian Midstream Energy Total Return Index ETN AMTR, i.e., 49.3% gain. Let’s find out what’s cooking up hot behind this space (see all MLP ETFs here).AI Boom Powering Gas-Pipeline StocksThe AI boom is driving up gas-pipeline stocks because artificial intelligence (AI) applications, particularly in data centers, require vast amounts of electricity. AI data centers require immense computational power for deep learning and other AI workloads. This results in higher demand for electricity.The heat generated by high-performance processors requires robust cooling systems, which further increase energy consumption. Data centers are expected to double or triple their power needs in the next five years, pushing utilities to expand natural gas usage. Natural gas is emerging as a reliable energy source for these data centers.Pipeline operators benefit from this boom as they transport the fuel needed to power these centers. To meet the rising electricity demand, utilities may invest in new natural gas power plants, increasing the need for expanded pipeline networks.The Start of Fed Rate-Cutting Cycle Since MLPs are publicly traded partnerships generally engaged in the transportation, storage, production or mining of minerals and natural resources, these often operate pipelines or similar energy infrastructure, making it an interest rate-sensitive sector.The Fed started to cut rates from September 2024. With the Fed likely to be dovish in the coming days on cooling inflation, interest rates should show a downtrend, which in turn would push bond yields lower. Quite expectedly, in a low-rate environment, MLPs are back on the table helped by a favorable operating backdrop.Even if long-term rates remain elevated on risk-on sentiments, MLP investing should not disappoint.  Most of the MLPs offer treasury-beating yields. Even if they end up witnessing capital losses, a higher yield would protect their portfolio to a large extent. For example, Alerian MLP ETF AMLP and InfraCap MLP ETF AMZA yield 7.53% and 6.94% annually, respectively.Lure of DividendsMLPs catch investors’ eyes as these do not pay taxes at the entity level and are thus able to pay out most of their income (more than 90%) in the form of dividends like REIT firms. While most traditional income asset classes produced miniscule yields, MLPs lured investors with their higher payouts and stable cash flows.Yes, MLPs underperform in a rising rate environment as these have to depend on the debt market to finance their operations or fresh projects. Naturally, higher rates would cut back their profitability. But investors should note that many MLPs use a fixed-rate debt for their borrowings.Bottom LineThanks to the above-mentioned developments, nearly all MLP ETFs have held up pretty strongly. MLP ETFs are not overvalued at the current level. Hence, one can expect further leg-up in MLP ETFs’ prices.Want key ETF info delivered straight to your inbox?Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.Get it free >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Alerian MLP ETF (AMLP): ETF Research Reports InfraCap MLP ETF (AMZA): ETF Research Reports Global X MLP ETF (MLPA): ETF Research Reports UBS ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB): ETF Research Reports ETRACS Alerian Midstream Energy Total Return Index ETN (AMTR): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks