A Close Look at AMZA - An ETF with 20% Yield

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    14-Apr-2017

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