AMZA: Taking A Risk On This 20% Yielding Midstream MLP ETF

Summary

• AMZA announced its 2Q dividend after Monday's close will be unchanged at $0.52.
• This puts AMZA's yield at 20.2%.
• I outline my reasons for re-entering a position in AMZA.

As is its standard approach, InfraCap MLP ETF (NYSEARCA:AMZA) announced its quarterly dividend after the close on the trading day before the announced ex-date. And again, as is its standard approach, the dividend continues at $0.52/share. With the ETF’s recent declines (although it has been recovering over the past week), that puts its yield at 20.2%.

I have expressed ambivalence regarding AMZA several times since I added it to my model High-Income, Sustainable Capital Portfolio (Retirement Income: The High-Yield Sustainable-Capital CEF Portfolio 2016 Report), but it remains in that portfolio where it was the only one of 15 holdings to give up value the past quarter. But its high yield helps support the high income I've targeted for that portfolio, even as it comes at the expense of the other targeted objective, capital sustainability.

For my own investing, I have owned, sold, and repurchased AMZA. On June 28, I felt the fund’s losses were excessive, and anticipating a July 5 ex-date, I decided to re-enter the fund to capture that dividend.

For those unfamiliar with AMZA, I'll turn to the ETF's description which tells us it is an actively managed fund invested primarily in the U.S. midstream energy infrastructure sector. It strives to generate total return through capital appreciation, a high level of current income, and steady growth in the income stream. AMZA invests in equity securities of publicly-traded master limited partnerships and limited liability companies taxed as partnerships as well as related general partners. Options strategies are used in an effort to enhance current income and manage risk.

AMZA has been widely covered on Seeking Alpha, and a search of the site will turn up vast amount of information and opinions on the fund.

AMZA began as an ETF on October 1, 2014, almost precisely as the MPL market began is long slide down as we see in this chart of the ALPS Alerian MLP Index (AMLP) for price and total return from AMZA's untimely start date. But AMZA, with its hefty dividend, slid about twice as much as the index ETF did.

The fund's holdings are weighted based on estimated total return and company fundamentals instead of market capitalization. One benefit to investing in the ETF rather directly in MLPs is that the ETF provides 1099 tax reporting (which should appeal to anyone who does not want to deal with K-1 tax reporting from the MLPs).

The fund is structured as a C-corporation, which means that it is taxed as a corporation at the fund level, with the benefit of its distributions usually being tax deferred. The C-corporation structure also allows the fund to fully allocate its assets to MLPs. Open-ended funds can only allocate a maximum of 25% of their assets directly to MLPs.

The top holdings of the AMZA portfolio are in the next table and give a picture of how the fund is structured.

This ETF has 35 long and 71 short positions in various securities of MLPs that transport, store or process energy products. Portfolio positions by security type break down as shown in the next table.

I was driven to re-enter AMZA at this time because I consider that MLPs, midstream MLPs especially, have suffered unreasonable losses in the market. The bottom may not be in, but it seems to me that it must be close.

John Devir from PIMCO (here) posted this informative chart and noted that he considered MLPs present an attractive opportunity. The chart plots MLP prices relative to the S&P 500. Devir notes that we are now at close to multi-year lows for MLPs.

I've redone that chart beginning at AMZA's start date using AMLP as the index and include the comparable chart for AMZA/SPY. We see that since Devir's article, there has been a small uptick in both the index and AMZA. Whether that trend continues remains to be seen. More to the point is that AMZA, unsurprisingly, has shown the same pattern as the index.

Devir considers the decline to be based on technical factors, not fundamentals, and suggests that the time is right for investing in MLPs. If this view is correct, and we've heard this before over the last year, so it remains to be seen if it is, why choose AMZA and not the broader MLP index fund?

My answer to that question is twofold. First is AMZA's 20% dividend. My approach to high-yield income investing these days is to target 8% current income and reinvest any excess. I try to select funds such that the full portfolio grows in capital value even with the 8% withdrawal rate. This high return helps lift my income portfolio over that 8% target leaving reinvestable funds. Some will argue that AMZA's yield is set unsustainably high, which may well be the case. But I am willing to accept some capital decay at this level.

This approach assumes there will be recovery in MLPs. If the broad category declines further, this will, of course, prove to be a poor call. But I strongly suspect that we are at, or at least very close to, a bottom for the category. I would like to be positioned to participate in any recovery that we see in MLPs.

The other reason I like AMZA is because its holdings are not MLPs broadly but are focused on midstream MLPs that collect, process, store or transport energy products. Midstream MLPs should be less sensitive to commodity prices, unlike MLPs involved in energy production.

Analyst’s Disclosure: I am/we are long AMZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment professional and this article does not constitute investment advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any security mentioned here is suitable for his or her portfolio.