Tapping into North American Energy Infrastructure for Income
Coulter Regal, CFA, Associate Product Manager
December 16, 2019
Income investors have become accustomed to expanding their search for yield beyond traditional fixed income securities for over a decade. Many have looked to alternative strategies such as preferred securities or dividend stocks to inject much desired income and diversification into their portfolios. One additional area that should not be overlooked lies within the growing North American energy complex.
The energy sector faced headwinds for much of 2019, including concerns over slowing global growth and seemingly never ending U.S.-China trade tensions. These concerns weighed on near-term energy demand outlook, and in turn, on energy companies, causing disappointing performance for the sector this year. Despite these headwinds, U.S. energy production and export growth remain strong. In a recent update, the Energy Information Administration increased their U.S. crude oil production forecast for the remainder of 2019 and 2020.1
Master Limited Partnerships (MLPs)2 and the broader category of energy infrastructure companies own the pipelines, storage tanks and processing facilities that help bring energy from the wellhead to end consumers. These companies feature an attractive yield and offer investors the potential to enhance and diversify exposure to alternative income sources. They also stand to be direct beneficiaries of the growing U.S. energy landscape.
Energy Infrastructure: High Income Potential
Data as of 9/30/2019
Source: FactSet. See definitions and disclosures at bottom of page.
Energy Infrastructure Positioned for Growth
The United States has experienced an energy renaissance over the past decade. Technological advancements in drilling techniques facilitated the profitable extraction of large reserves of crude oil and natural gas trapped in American shale rock. The U.S. became the world’s largest oil producer in 20183 and is projected to become a consistent net energy exporter in 20204. This significant growth in North American oil and gas production has increased the need for supporting infrastructure, including new pipelines connecting producing regions with demand centers and the coast for export. A 2018 study by the Interstate Natural Gas Association of America estimated that an investment of $521 billion in midstream energy infrastructure is needed in the U.S. and Canada by 2035.5
Additionally, energy infrastructure companies generally do not have direct exposure to commodity prices. Instead, they focus on the more stable business lines within the energy complex.6 Their businesses function primarily on a set fee per volume or fee for service basis and are historically driven by volumes rather than spot prices. The segment also generates diverse revenue streams through multiple sources including transportation, processing and storage for many upstream producers. This defensive, fee-based business model has helped insulate energy infrastructure companies from volatile energy prices and positioned them to potentially benefit broadly from growing energy production and exports.
Monthly U.S. Crude Oil Production and Exports
January 2010 – August 2019
Source: U.S. Energy Information Administration.
Tax-Loss Selling Opportunity
With equity markets trading near all-time highs and bond prices rallying off the decline of U.S. Treasury yields, most major indices have delivered positive total returns in 2019, limiting the potential for tax-loss selling. However, there are still a few categories, such as MLPs or other areas within the U.S. energy sector, which faced headwinds this year and may have harvestable losses for investors, depending on their cost basis. Investors with unrealized losses in these areas may be able to deploy a tax-loss selling strategy to improve their portfolio’s tax efficiency. A tax swap strategy—involving the sale of one fund with losses, potentially a pure MLP fund, and the simultaneous purchase of another one with similar exposure, such as a more broad energy infrastructure fund—could create a recognized tax loss to offset realized or future capital gains while still allowing the investor to maintain market exposure.
Comprehensive Access to North American Energy Infrastructure
Direct investment in energy infrastructure, including MLPs, has historically been a complex matter. The VanEck Vectors®Energy Income ETF (EINC) provides comprehensive access to North American energy infrastructure companies without K-1 tax reporting, fund-level taxation, leverage or debt counterparty risk. EINC seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS®North America Energy Infrastructure Index (MVEINC), which is intended to track the overall performance of North American companies involved in the midstream energy segment. This includes MLPs and corporations involved in oil and gas storage and transportation.
1Source: U.S. Energy Information Administration, November 21, 2019
2Master Limited Partnerships (MLPs) are business ventures in the form of publicly traded limited partnerships.
3Source: U.S. Energy Information Administration, September 12, 2018
4Source: U.S. Energy Information Administration, January 29, 2019
5Source: North America Midstream Infrastructure through 2035
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
On February 22, 2016, the Fund acquired all of the assets and liabilities of the Yorkville High Income MLP ETF "the Predecessor Fund". As a result of the Reorganization, the Fund adopted the financial and performance history of the respective Predecessor Fund. Accordingly, for periods prior to that date, any Fund performance information is that of the Yorkville High Income MLP ETF.
Prior to December 2, 2019, the VanEck Vectors Energy Income ETF’s name was VanEck Vectors® High Income MLP ETF.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
INDICES: Energy Infrastructure: The MVIS® North America Energy Infrastructure Index is a rules-based index intended to track the overall performance of the North American energy infrastructure segment. U.S. High Yield Bonds: Barclays Capital US High Yield Very Liquid Index is a more liquid version of the Barclays Capital US Corporate High-Yield Index that measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. REITs: FTSE NAREIT Equity REITs Index is a broad-based, free-float adjusted market capitalization weighted index consisting of equity real estate investment trusts. Utilities: S&P® 500 Utilities Index, consists of widely held utility common stocks of the S&P® 500 Index. U.S. Investment Grade Bonds: Barclays Capital US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. U.S. 10-Year Treasury Bonds: ICE BofAML Current 10-Year US Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury bond. U.S. Stocks: The S&P® 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
MVIS North America Energy Infrastructure Index is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of the Adviser), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Energy Income ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index's performance is not illustrative of a fund's performance. Indices are not securities in which investments can be made.
An investment in the Fund may be subject to risks which include, among others, risks specific to oil and gas companies (midstream, marine shipping, geopolitical risk), investing in Canadian issuers, MLP, MLP Tax, energy sector, return of capital distributions from the fund reduce the tax basis of fund shares, liquidity, market, operational, medium – capitalization companies, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, high portfolio turnover, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully beforeinvesting. To obtain aprospectus and summary prospectus, which contains this and other information, call 800.826.2333or visitvaneck.com/etfs. Please read the prospectus and summary prospectuscarefully before investing.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at firstname.lastname@example.org for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Securities Corporation, Distributor 666 Third Avenue New York, NY 10017800.826.2333