AMZA: A Good Fund, But Broader Energy Is Still Outperforming
Summary
- InfraCap MLP ETF is an actively managed fund that invests in midstream energy MLPs, generating stable cash flows from long-term contracts.
- The fund employs modest leverage and options strategies to generate additional income sources.
- AMZA's performance is subject to market volatility and carries a higher degree of risk due to its use of leverage and options strategies.
zhengzaishuru
Formula for success: rise early, work hard, strike oil. - J. Paul Getty
Before we get into the investment case for the InfraCap MLP ETF (NYSEARCA:AMZA), it's essential to understand the nature of Master Limited Partnerships (MLPs). In the energy sector, MLPs are business ventures that play a critical role in the oil and gas industry. They often operate in the midstream segment, which involves the transportation, storage, and processing of these commodities. This places MLPs in a unique position in the energy value chain, where they can generate stable cash flows from long-term contracts, irrespective of the volatility in commodity prices.
Overview of InfraCap MLP ETF
AMZA is an actively managed Exchange Traded Fund (ETF) that primarily invests in such midstream energy MLPs with an emphasis on high current income. The fund employs modest leverage, typically ranging between 20-30%, and also uses options strategies to generate additional income sources.
Unlike passive funds that seek to replicate a specified index's performance, AMZA is actively managed. This means that the fund's security selection and weightings are based on a careful analysis of each security's fundamental and technical factors, instead of merely following market capitalization. This active management approach allows the fund to adapt to changing market conditions and capitalize on potential investment opportunities.
As of 6/30/23, holdings include well-known companies in the space, with some large weightings at the top of the fund.
Virtus.com
Options Strategies for Income Generation
Alongside leverage, AMZA also employs options strategies as a means to generate additional income. This involves writing call and put options on various MLPs. While these options strategies can provide an extra source of income, they also come with their own set of risks. For instance, selling call options could limit the fund's potential profits if the price of the underlying asset increases, while selling put options could result in losses if the option is exercised while the asset's price is rising.
Understanding Dividend Yield and Expense Ratio
AMZA is attractive to many investors due to its high dividend yield. However, it's important to note that the fund's dividends have been shrinking along with its share price. If you bought AMZA for its high dividend yield a decade ago, your yield on the original investment would be significantly lower today due to the reduction in dividends.
YCharts
Moreover, AMZA comes with a relatively high expense ratio of 1.64%. This is the cost of running the fund, and it's deducted from the fund's assets. This high expense ratio can eat into your returns, especially when the fund's performance is lagging.
Performance Analysis
Like all investments, AMZA's performance is subject to market volatility. Since its inception, the fund has shown a mix of periods with positive returns and periods with negative returns. It's important to note that an investment in AMZA involves a higher degree of risk due to the fund's use of leverage and options strategies. Therefore, potential investors should carefully consider these risks before investing in the fund.
I'd note it's hard to identify what has caused some of the broader underperformance here relative to Energy since late July. Regardless, this is a good reminder that yield is one thing and total return another.
Morningstar.com
Conclusion
Investing in the InfraCap MLP ETF can be a potentially profitable venture for those seeking exposure to the midstream energy sector and high-income potential. However, the fund's use of leverage and options strategies introduces a higher level of risk, making it crucial for investors to thoroughly understand these aspects before investing. The Fund's performance has been mixed, and relative to the Energy sector (XLE) more broadly, it has underperformed.
Stockcharts.com
While the fund has shown periods of strong performance more recently, its outlook is heavily dependent on broader economic conditions and market trends. With all that said, the InfraCap MLP ETF offers a unique approach to investing in the midstream energy sector, combining active management, leverage, and options strategies to generate high current income. I think it's a good fund, but there are better ways of betting on Energy for now.
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