What is EMLP? (Pros, Cons, and Strategies)

If you’re an investor interested in energy infrastructure, you might want to consider EMLP for your portfolio. EMLP, or the First Trust North American Energy Infrastructure Fund, provides exposure to U.S. and Canadian energy infrastructure companies. In this blog post, we’ll delve deeper into EMLP, explore its advantages and disadvantages, and discuss strategies for effectively incorporating it into your investment plan.

What is EMLP?

EMLP is an exchange-traded fund (ETF) managed by First Trust. It targets investments in North American energy infrastructure companies, such as those involved in the transportation, storage, and processing of energy commodities.

Unlike traditional energy sector ETFs, EMLP includes not only Master Limited Partnerships (MLPs) but also corporations and other entities involved in the energy infrastructure sector, providing a balanced exposure to the broader energy market.

Key Features of EMLP

• Diversified Energy Infrastructure: EMLP isn't limited to MLPs, allowing it more flexibility in its investments.
• Hybrid Structure to Avoid K-1s: EMLP uses a C-Corp structure, which means investors receive a 1099 form rather than a K-1, simplifying tax reporting.
• Active Management: EMLP is actively managed, enabling the fund managers to take advantage of market opportunities and manage risks more effectively.

EMLP Composition

EMLP is comprised of a variety of energy infrastructure companies. Some of its top holdings include familiar names like Enbridge Inc. (ENB), TC Energy Corporation (TRP), and Kinder Morgan Inc. (KMI). The fund also invests in a mix of midstream corporations, utilities, and other energy infrastructure entities, ensuring a well-rounded exposure to the sector.

Pros of EMLP

Diversified Exposure

EMLP offers diversified exposure to the North American energy infrastructure market, including MLPs, C-Corps, and other related entities. This diversification mitigates risks specific to MLPs, such as tax complications and regulatory challenges.

Simplified Tax Reporting

Due to its C-Corp structure, EMLP investors receive a 1099 form instead of a K-1, simplifying tax filing. MLP-focused ETFs often issue K-1s, which can be cumbersome and complicated, especially for individual investors.

Stability due to Active Management

EMLP benefits from active management, meaning that professional fund managers actively select and adjust the portfolio holdings based on market conditions. This can potentially result in better risk-adjusted returns compared to passively managed ETFs.

Cons of EMLP

Higher Expense Ratio

Compared to passively managed ETFs, EMLP carries a higher expense ratio due to its active management. The expense ratio can eat into returns over the long term, especially when compared to lower-cost index ETFs.

Dependence on Energy Sector Performance

While EMLP provides diversified exposure within the energy infrastructure sector, it is still inherently linked to the performance of the energy market. Fluctuations in energy prices, regulatory changes, and other sector-specific risks can impact the fund’s performance.

Limited Growth Potential

Energy infrastructure companies tend to have slower growth rates compared to other sectors like technology. This might be a drawback for investors looking for high-growth potential stocks or ETFs.

EMLP Investment Strategies

While EMLP may not suit every investor, it offers distinct benefits for those looking to capitalize on stable, income-generating energy infrastructure assets. Here are a few strategies to consider:

Long-term Holding for Income

Given its focus on stable energy infrastructure companies, EMLP can serve as a long-term holding to generate consistent income. This makes it suitable for income-focused investors, including retirees, seeking stable cash flows from dividend distributions.

Diversification Instrument

Investors looking to diversify their portfolio with energy infrastructure assets can use EMLP as a complementary holding. Its diversified composition across different types of energy infrastructure entities provides balanced exposure, thereby mitigating risk compared to other sector-specific ETFs.

Tactical Allocation

For tactically minded investors, EMLP can be used to gain exposure to the energy sector during favorable market conditions. Active management within the fund allows it to potentially capitalize on market opportunities and manage risks better than a purely passive approach.

Conclusion

EMLP offers a unique investment opportunity in the energy infrastructure sector, balancing MLPs with other types of entities to provide diversified exposure. While it comes with certain risks and higher expenses, its active management and simplified tax reporting offer compelling advantages. Whether used for long-term income, diversification, or tactical allocation, EMLP can be a valuable component of a well-rounded investment portfolio.

Consider consulting with a financial advisor to determine how EMLP fits into your investment strategy and risk tolerance. Happy investing!