Wednesday, October 16, 2019 6:13 PM EST
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.
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 ...
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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 level, and may, in its sole discretion, discontinue the public disclosure of the intraday index value and the end-of-day closing value of the index. The indices lack diversification and are vulnerable to fluctuations in the applicable sector. A limited number of index constituents may affect each Index Closing Level, and the Indices are not necessarily representative of their focus industry. An index constituent may be replaced upon occurrence of certain events. The manner in which each index selects its components may differ from how other index providers or market participants might do so.
Use of Hypothetical Back-Tested Data - The historical data of the Indices shown herein is from the dates displayed. Any index data shown prior to that date is hypothetical and a result of the application of the index methodology to historical data, and has inherent limitations. The creation of hypothetical data necessarily involves assumptions and cannot take into account the impact of financial risk in actual trading. Alternative modeling techniques or assumptions may produce different hypothetical back-tested information that might be more appropriate and that might differ significantly from the information presented herein. The hypothetical back-tested data herein should not be considered indicative of actual results that might be obtained from an investment in a financial instrument referencing the index.
Historical and hypothetical back-tested results are neither an indicator nor a guarantee of future index performance.
This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice.
MicroSectors™ and REX™ are registered trademarks of REX Shares, LLC (“REX”).
Dorsey, Wright & Associates, LLC (“DWA”) makes no warranty, express or implied, as to the results to be obtained by Bank of Montreal, the investors in the ETNs, or any other person or entity from the use of the DWA MLP Select Index or the ETNs. DWA expressly disclaims all warranties of merchantability or fitness for a particular purpose. DWA and BMO shall have no liability to each other or to any third party for lost profits or indirect, punitive, special or consequential damages (including lost profits) arising out of the licensing arrangements between the parties, even if advised of the possibility of such damages.
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