Introducing The Dorsey Wright MLP Index

Similar to investing in other assets, there can be benefits to holding a basket of MLPs to offset the idiosyncratic risk of owning an individual MLP. Alerian launched the first real-time MLP index (the Alerian MLP Index) in 2006. This index is largely considered to be the MLP benchmark. While new and novel at the time, the Alerian index has stayed the same while the MLP landscape has evolved. The Alerian MLP Index limits its investable universe to Midstream MLPs (MLPs that earn a majority of their cash flow from transporting, storage and marketing of oil and gas). Similar to investing in a diversified basket of stocks, wouldn’t it seem prudent to invest in a diversified MLP index?  

Introducing the Dorsey Wright MLP Select Index

The Dorsey Wright (“DWA”) MLP Select Index is designed to select the best performing MLPs based on their relative strength every month. While most MLP indices simply track midstream MLPs, the selection universe of the DWA MLP Select Index includes all MLPs with the exception of financial MLPs. In addition, eligible MLPs in the DWA index must, have a minimum market cap of $1B and each MLP must have one month average daily trading volume of $2 million per day on its primary exchange.

On a monthly basis the Dorsey Wright MLP Index selects the top 15 MLPs based upon Dorsey Wright’s proprietary Relative Strength Ranking methodology and equally weights them. Combining this relative strength based selection and equal weight methodology has resulted in historical outperformance and lower historical volatility than the Alerian MLP Index.

(Click on image to enlarge)

Source Bloomberg, 05/01/15 – 09/30/2019

Staying allocated towards the stronger performing members of the MLP universe may help diversify risk away from those MLPs that may be underperforming.

MLP Index Comparison: Alerian vs. Dorsey Wright

The most popular benchmark of the MLP sector is the Alerian MLP Index (AMZ). Despite being a standard for MLP’s, the index is limited to midstream companies. While the Energy Infrastructure Council classifies roughly half of all MLPs as midstream, they do not make up the entire MLP marketplace. The Dorsey Wright relative strength index methodology screens all MLPs (with the exception of financials) and picks the 15 MLPs with the highest ranked relative strength regardless of whether or not a company is upstream, midstream, or downstream.

View single page >> |

Disclaimer: Each index has limited actual historical information. The Index Calculation Agent (as defined in the applicable pricing supplement), may adjust the index in a way that may affect its ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.
Comments have been disabled on this post.