The rout in interest rate sensitive stocks, exchange traded funds (ETFs). publicly traded master limited partnerships (MLPs) and bonds presents some opportunities but not across the board. Some sectors are more interesting than others if you believe Chairman Bernanke’s economic forecast. If the economy is indeed on a sustainable path toward growth and increasing employment, the economically sensitive sectors will also have improving fundamentals. Remember, there are two things that impact fixed income like products; interest rates and business risk. An improving economy will help junk bonds as their business prospects will improve. The same is true for many MLPs that are transporting economically sensitive commodities like crude oil and natural gas.
That wasn’t the case with many junk bond ETFs last week that got crushed right along with their more highly rated brethren. The reality is that junk bonds might be priced too low to start with. Even after the debacle in fixed income, HYG and other junk bond ETFs are still yielding slightly under 5%. That’s just too low for a speculative grade of debt. On the other hand a number of MLPs are yielding closer to 6 & 7 % and that might be just right or even cheap. The Alerian MPL ETF (AMLP) yields 5.95% based on Friday’s close. The yield is good compared to junk bonds and the ETF certainly has fared better (gone down percentage wise less than the bond market) The management expenses on AMLP are almost 5% per year. You will be much better off buying your own basket of ETFs. The two largest ones are Kinder Morgan Partners KMP yielding 6.40% and Enterprise Product Partners, LP at 4.60%. Our favorite at the moment is NuStar Energy LP NS which yields 10.10%. NS is only earning about 70% of its distribution last quarter but expects to be earning the full amount by the end of 2013. That’s already discounted in its current price of $43.85. If NS does live up to its public assurances of earning its distribution by year-end the stock could exceed its March 2012 high price of $62.