A Close Look at AMZA - An ETF with 20% Yield
InfraCap MLP ETF AMZA is an actively managed Exchange Traded Fund
focused on the Midstream Oil & Gas MLP space. The managers are
Infrastructure Capital Advisors.
AMZA is a relatively new ETF which started trading in late 2014. The ETF
currently yields close to 20%.
After a period of underperforming the infrastructure index AMLP in 2015,
AMZA has been an outperformer.
Over the past 3 months, AMZA achieved 38% total returns compared to
25% for the Alerian ETF, AMLP.
A close look at this misunderstood ETF.
Outlook for Oil and Gas MLPs
This is a follow up on a recent report posted on Seeking Alpha on the
outlook of global oil supply and demand trends over the next 5 years. The
report also includes the outlook and valuations for the largest oil & gas
MLPs.
The conclusion of the report:
"Despite the recent price rally in the oil and gas MLP space, the sector
remains severely undervalued. The large MLPs have a 40% to 75% upside
which can be achieved over the next two to three years, in addition to the
hefty distribution yields averaging around 10%."
InraCAP MLP ETF (NYSEARCA: AMZA)
InfraCap MLP ETF is an actively managed Exchange Traded Fund in the Oil
& Gas MLP space, managed by Infrastructure Capital Advisors. The Fund is
invested primarily in the U.S. midstream energy infrastructure sector.
The ETF is relatively new and started trading on the New York Stock
Exchange in October 2014, around the time when Oil & Gas MLPs were
under severe selling pressure. The total assets of this ETF amounted to
around $42 million. AMZA trades based on its Net Asset Value (NAV), which
is reported on a daily basis by its manager.
The ETF pays $2.08 per share yearly, which gives it a yield close to 20%.
Holdings
This ETF invests primarily in first class oil and gas MLPs with the following
characteristics:
1. Investment grade credit.
2. Stress tested to perform well regardless of oil prices.
3. History of earnings growth.
4. History of dividend growth.
5. Full cycle companies which can thrive in different phases of the oil
cycle.
If we take a close look at the top holdings of AMZA, we find they are the
same as those of the ALPS Alerian MLP ETF (NYSEARCA : AMLP);
however, the weightings are different. The current top 10 holdings of
AMZA are the following:
An actively managed strategy
AMZA is an actively managed ETF. Therefore, it provides more added
value to investors. The following is the strategy used by its manager to
maximize income and growth:
1. Flexible allocation: AMZA managed to build a model to track MLPs
that are undervalued or those with the best upside potential. They
have flexibility to allocate investments to those companies that are
best poised to outperform. For example, they outweigh those
companies who will benefit from mergers and acquisitions, or those
which become severely oversold. AMZA management increased
allocation on Energy Transfer Equity (NYSE:ETE) when the stock
collapsed last February to the price of $4/share. ETE trades today
close to $13/share. Finally, AMZA has a unique advantage because it
can add the General Partners (NYSE:GPS) of MLPs (Parent Companies
of MLP companies) to their portfolio holdings. The General Partners
also pay high distribution yields and many are not Master Limited
Partnerships. GPs are added to the portfolio using an opportunistic
strategy.
2. Use of leverage: AMZA has the flexibility to use leverage with a
target of 20% to 25%. The added leverage helps the ETF to capture
higher distribution yields paid by the underlying companies. This also
enables it to pay shareholders higher distributions.
3. Writing covered calls: Finally, AMZA management uses a covered-
call strategy to boost income. Covered calls can help reduce the ETF
volatility during market turbulence. Also covered calls can be a good
source of income during periods of price stability.
Why did AMZA underperform AMLP in 2015?
Based on an exclusive interview I had with the managers of the ETF,
"Infrastructure Capital Management," AMZA seeks to pay a steady
distribution of around $2.08/share per year (current yield 20%) and to keep
a stable Net Asset Value. It seems that management seeks to achieve this
return based on the following sources of income:
1. The distribution yield of the underlying stocks, which currently
comes to 9%.
2. A 1.5% extra income from leverage.
3. Writing covered calls, which can possibly achieve around 2% return
when the markets are not volatile.
4. It seems that management seeks to fund the shortfall of 6.2% from
capital gains achieved on the underlying holdings to shareholders.
At first glance, the strategy used by the ETF seems logical, since most
companies held in the portfolio are growing at a rate of 6% or more
annually.
However, the fixed distribution, "regardless of the performance of the
underlying portfolio," puts the performance of the ETF at risk during severe
market downturns. This is exactly what happened in 2015. As the
underlying stocks kept falling, the ETF had to sell a part of its holdings at
low prices in order to return a steady distribution yield to shareholders. This
led to a deterioration of NAV, which is the main reason why AMZA has
underperformed AMLP.
Note on the 20% yield
AMZA pays to investors an amount of $2.08/share every year. This comes
to 19.7% yield. On certain finance websites, the yield shows as 11.69%.
This would be the 12-month trailing SEC yield, which is computed by
subtracting any "return of capital" to shareholders (Return of Capital
represents unearned returns paid to shareholders in the form of
distributions).
The 11.69% represents the dividends and income earned by AMZA over the
past 12 months, as AMZA paid some "return of capital" to shareholders in
2015; however, no such returns were made during 2016. Therefore, the
reported SEC yield is not an indicator of actual distributions (which are
19.7%) or of future performance. I expect AMZA to keep outperforming in
the future, as it has done over the past 3 months.
Outperformance of the past 3 months
The strategy used by the ETF has finally paid-off. On a total return basis
(including dividend reinvestment), AMZA has delivered almost 38% return
over the past three months compared to only 25% return by AMLP.
Given the bullish outlook in the midstream oil & gas space, AMZA is likely
to continue to deliver stellar results. I expect that the 20% yield paid by
AMZA can reasonably be achieved by the fund managers and is unlikely to
contribute to a reduction in NAV over a horizon of 2 to 3 years.
Simplified Tax Accounting
Like AMLP, AMZA is taxed as a c-corporation. Therefore, investors get the
Form 1099 and not K-1. This provides investors with an entry to the oil and
gas MLP space without tax complications.
Also for International investors, AMZA is a good alternative to investing
directly into MLP stocks, as many non-resident investors have reported that
they are getting subjected to a large withholding tax on distributions paid
by Master Limited Partnerships - as much as 40%.
Conclusion: AMZA is well positioned for the future
I believe that AMZA started trading in 2014 in the worst environment.
Therefore, the past performance does not provide a good base for the great
potential of this ETF.
AMZA operates best and outperforms when MLP prices are stable or going
up. With quite a positive outlook for this space, AMZA is set to continue to
outperform and generate additional returns to investors through options
writing and through its opportunistic portfolio management. I believe
owning AMZA in addition to AMLP, or as an alternative to AMLP, is a good
strategy as it provides a managed aspect to this sector, and is likely to be
a highly profitable investment.
Consider following me for the latest updates on the best high-yield MLPs,
Property REITs, Business Development Companies & Closed End Funds!
For continuous coverage of high dividend stocks trading at bargain prices,
join us at High Dividend Opportunities and benefit from Live Alerts to
pick them up. High dividend Opportunities, my premium service on Seeking
Alpha, is dedicated to bring investors the most profitable and newest
high-dividend ideas.
Disclaimer: "High Dividend Opportunities" service is impersonal and does
not provide individualized advice or recommendations for any specific
subscriber or portfolio, as I have no knowledge of the investor's individual
circumstances. Subscribers/readers should not make any investment
decision without conducting their own research and due diligence, and
consulting their financial advisor about their specific situation.
Disclosure: I am/we are long AMZA, AMLP, MLPQ, EPD, CEQP, ETE, SXL,
MLPQ.