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The looming threat of a global trade war could create a unique speed bump for the rallying master limited partnership fund category. but the next move in navigating the slippery energy sector depends on your outlook for oil prices.
Mutual funds investing in the pipelines that collect tolls for transporting commodities like oil and natural gas have been on a tear this year. The category average for energy limited partnership funds is a 19.7% gain since the start of the year. which compares to the 13.9% gain by the S&.P 500 Index over the same period. according to Morningstar.
But the future of those funds` run will be heavily influenced by the price of oil. and that`s becoming a bigger question by the day as the U.S. and China continue to launch tariff threats.
For financial advisers enjoying the rally in master limited partnership funds. the worst-case scenario is a big drop in oil prices. Fortunately that is the least likely scenario at this point.
We`ll know more in about a month when President Donald J. Trump is scheduled to meet with China`s President Xi Jinping at the Group of 20 summit in Japan. Until then. the decision will be whether to continue enjoying the energy pipeline ride or jump over to a more direct commodity play in anticipation of a spike in energy prices because of the tariffs.
A sudden drop-off in the demand for oil from China and the emerging markets would drive oil prices down. said Stewart Glickman. an energy equity analyst at CFRA.
`No deal out of the June summit is probably negative for oil demand. and if that`s not already baked in. energy names will take a hit.` Mr. Glickman said. `If there is a deal. it will benefit the folks favoring the risk-on trade.`
The price of crude oil is up about 30% this year. almost double the performance of direct energy-production plays like the Energy Select Sector SPDR ETF (XLE).
If you`re playing along at home. the safest bet is probably sticking with the energy limited partnership funds. which will continue to collect energy-transportation tolls in most energy-price scenarios — the exception being an extreme drop in energy prices.
But. as always. it boils down to selection from a category that averaged a 9-basis-point loss last year and this year has seen gains ranging from 7.2% for James Alpha MLP (JAMLX) to 31.6% by Highland Energy MLP (HEFAX).
The more aggressive. risk-on move is a bet on a full-blown trade war that would likely drive oil prices higher and benefit direct-play funds like Fidelity MSCI Energy Index ETF (FENY). First Trust Energy AlphaDEX (FXN) and Vanguard Energy (VDE). as well as XLE.
`If a trade war happens. expect rising oil prices. which will benefit the exploration and production companies.` Mr. Glickman said. `If oil prices are flat or slightly down. that continues to benefit the midstream companies. and if oil prices are strongly down. you need to find a different sector.`
