Amid heightened volatility, oil price has nicely rebounded from the low levels it hit in mid February. This is especially true as the price hit a three-month high in last week's trading session with U.S. crude climbing above $38 per barrel and Brent popping above $41 per barrel.

Impressive gains came on the back of improving demand/supply dynamics, which are rebuilding investors lost confidence in the rebalancing of the oil market. Some of the major developments include hopes of a deal by major oil producers to freeze oil output at the January level, signs of falling domestic and the Organization of the Petroleum Exporting Countries (OPEC) production, receding fears of recession in the U.S., and signs of stabilization in China and the other developed economies.

Additionally, the latest data that shows a big gasoline and diesel inventory drawdown injected more optimism into the oil market. All these have spurred a rally in every corner of the energy space. In particular, master limited partnerships (MLPs) have been leading the energy space over the past one-month period. Though their revenues are not dependent on oil price, these stocks were also victims of the oil collapse. Now, with the rally in price and investors’ hunt for income-focused securities, MLPs have benefited the most (read: 4 Energy ETFs Outperforming on Oil Rebound).

MLPs: A Good Bet?

Most MLPs are engaged in the processing and transportation of energy commodities such as natural gas, crude oil, and refined products. As such, they are not directly linked to the price of oil and are likely to be the major beneficiaries of an oil boom in the long term. Acting as toll-takers, these MLPs earn revenues on the volumes that flow through pipes and not on the commodity price. This nature of business will definitely give a boost to these stocks given the U.S. shale boom.

MLPs have relatively consistent and predictable cash flows, making them safer and less risky than other plays in the broader energy space. These represent an attractive investment option for income-focused investors as MLPs pay out substantially all of their income to investors on a regular basis. In addition to high yields and the potential for capital appreciation, MLPs also have lower volatility and provide diversification benefits to the portfolio.

Nevertheless, like all high-income products, MLPs tends to react negatively to a rising rate environment. This is because as yields rise, MLPs might face problems in raising fresh capital from debt markets for funding new projects thereby hurting their profitability. But this doesn’t seem as too much of a concern at present as the Fed will follow a slower rate hike path this year. Additionally, most MLPs use a fixed rate debt for their borrowings.

Further, investors hold MLPs for a long time due to tax consequences and thus do not react adversely to rising interest rates unlike other rate sensitive assets like utilities and REITs (read: MLP ETFs Trading at a Huge Discount to NAV).

Given the pros and cons, MLPs seem great picks for this year. Below we highlight four MLP ETFs that could be excellent choices for investors’ seeking to tap the oil price rebound while at the same time looking for a high yield. All these products have delivered handsome returns from a one-month look.

Infracap MLP ETF (AMZA - ETF report)
 

This is an actively managed ETF providing exposure to the U.S. midstream energy infrastructure sector. Holding 30 stocks in it basket, the fund is heavily concentrated with double-digit exposure going to the top three firms. It is unpopular and illiquid in the MLP space with AUM of $26 million and average daily volume of 47,000 shares. The product pays an astounding annual dividend yield of 22.68% and thus its higher expense ratio of 1.11% is justified. AMZA returned 31.5% over the past one month (see: all the MLP ETFs here). 

Alerian MLP ETF (AMLP - ETF report)

This fund tracks the Alerian MLP Infrastructure Index, holding 23 U.S. stocks in its basket. It is concentrated on the top five holdings with over 9% share each. AMLP is the most popular and most liquid ETF in the MLP space with AUM of $6.8 billion and average daily volume of 15.4 million shares. It charges 5.43% in expense ratio, which seems justified given its high annual dividend yield of 11.15%. The ETF is up 24.8% in the same time frame.

Global X MLP ETF (MLPA - ETF report)

This product tracks the performance of the Solactive MLP Infrastructure Index and holds 21 stocks with heavy concentration on the top 10 holdings at 64.9%. It charges 3.99% in fees per year and trades in lower average daily volume of more than 311,000 shares. With AUM of 219 million, MLPA has an annual dividend yield of 10.49% and gained 22.1% over the past one month.

Market Vectors High Income MLP ETF (YMLP - ETF report)

This fund follows the Solactive High Income MLP Index, charging 85 bps in annual fees. Holding 26 stocks in its basket, it is highly concentrated on the top 10 holdings at 57.3%, suggesting a higher concentration risk. The product has managed $72.4 million in its asset base and trades in volume of more than 142,000 shares a day on average. It has gained 19% in the same time period and yields 28.63% in annual dividend (read: Hit and Flop ETFs of February).