A link to the latest Global X MLP Monthly can be found here.
The Energy sector carried its momentum from the end of 2020 into 2021 and ended Q2 as the S&P 500’s best performer after returning a staggering 45.61%.1 Importantly, oil and gas production stabilized after a tumultuous COVID-19-induced period for producers. Certain regions face a slowed reopening as they struggle to get ahead of the virus, but major consumption centers have the global economy moving in the right direction, which bodes well for the industry. For midstream companies, the unfolding recovery led to stronger Q1 earnings and sparked mergers and acquisitions (M&A). Also renewing investor interest in the segment was the rotation from Growth to Value stocks and rising bond yields. All told, we believe midstream’s multifaceted use cases make it particularly compelling in the current environment.
- Energy demand is rising as major economies around the world engage in the re-opening process, and significant improvements in economic data is now beginning to reflect that reality.
- US energy production is expected to increase going into 2022, led by natural gas production.
- Strong midstream earnings and a broader shift to cyclical assets creates an ideal outlook for midstream companies heading into the second half of 2021.
Oil & Gas Demand Expectations Rising with Re-opening On Track
Much of the global economy has turned the corner on the pandemic after vaccination rollouts, but secondary bouts of COVID-19 and its variants are concerns in parts of Asia and South America. India’s recent COVID spike is the most prominent example, being one of the top 10 largest economies in the world. However, the implications for the global re-opening timeline appear modest.
Setting the stage for a smoother re-opening in the second half of 2021 is the vaccination charge led by North America and developed Europe. As such, the International Energy Agency (IEA) now estimates that oil demand will reach pre-pandemic levels by the end of 2022. Demand in 2020 declined by 8.6 million barrels a day (mbpd), but a 5.4 mbpd recovery is expected for 2021 and another 3.1 mbpd increase for 2022.
Most notably, the US is progressing towards a fully functioning economy with virtually every US state fully re-opened already or with plans to do so by July. Important for the US oil and gas industry is that demand expectations are rising and economic data is beginning to reflect this reality. In May, daily average gasoline prices crossed $3 and inflation hit 5.0%, peaking after persistent sub-2% levels.2
1. GICS Level 1 Energy sector returns from 12/31/20 to 6/30/21.
2. Average national gasoline prices, Bureau of Labor Statistics as of 5/31/2021.
S&P MLP Index: Provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ. The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits.
Bloomberg Barclays US Corporate High Yield Total Return Index: Measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indices’ EM country definition, are excluded.
ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index: Tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market.
Bloomberg Barclays EM USD Aggregate Total Return Index: A flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate USD dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
FTSE NAREIT All Equity REITS Index: A free float adjusted market capitalization weighted index that includes all tax qualified equity REITs listed in the NYSE, AMEX, and NASDAQ National Market.
Bloomberg Barclays US Corporate Total Return Index: Measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Solactive MLP & Energy Infrastructure Index: The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations.
S&P 500 Index: S&P 500 Index tracks the performance of 500 leading U.S. stocks and captures approximately 80% coverage of available U.S. market capitalization. It is widely regarded as the best single gauge of large-cap U.S. equities.
Originally Posted on July 14, 2021 – MLP Insights Q2 2021: Energy Sector Momentum Continues
This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation. Indices are unmanaged and do not reflect the effect of fees. One cannot invest directly in an index.
Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company, LLC.
Investing involves risk, including possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). The Global X MLP Funds invest in the energy industry, which entails significant risk and volatility. The Funds invest in small and mid-capitalization companies, which pose greater risks than large companies. MLPA has a different and more complex tax structure than traditional ETFs and investors should consider carefully the significant tax implications of an investment in the Fund. The Funds are non-diversified. Current and future holdings are subject to risk.
MLPA is taxed as a regular corporation for federal income tax purposes, which differs from most investment companies. Due to its investment in MLPs, the fund will be obligated to pay applicable federal and state corporate income taxes on its taxable income as opposed to most other investment companies. The fund expects that a portion of the distributions it receives from MLPs may be treated as tax-deferred return of capital. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor’s return from an investment in the fund. The fund will accrue deferred income taxes for any future tax liability associated certain MLP interests. Upon the sale of an MLP security, the fund may be liable for previously deferred taxes which may increase expenses and lower the fund’s NAV.
The potential tax benefits from investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value.
Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. In addition to the normal risks associated with investing, real estate and REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock. U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds’ summary and full prospectuses, which may be obtained by calling 1-888-GX-FUND-1 (1-888-493-8631), or by visiting www.globalxetfs.com. Read the prospectus carefully before investing.
Disclosure: Global X ETFs
Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s full or summary prospectus, which may be obtained by calling 1-888-GX-FUND-1 (1.888.493.8631), or by visiting globalxfunds.com. Read the prospectus carefully before investing.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Global X ETFs and is being posted with permission from Global X ETFs. The views expressed in this material are solely those of the author and/or Global X ETFs and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Tax-Related Items (Circular 230 Notice)
The information in this material is provided for informational purposes only and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.