NEW YORK (Fabian Capital Management) -- Income investors that have sought out alternatives to traditional dividend-paying equities and fixed-income have largely been rewarded this year. The combination of higher yields and non-correlated returns within the context of a diversified portfolio are attractive qualities for asset classes such as master limited partnerships, real estate investment trusts and preferred stocks.
Most investors tend to flock to the oldest and largest exchange-traded funds in these respective categories. This is probably because the funds are well known and have been used successfully in the past or they represent the most diversified mix of underlying securities. They are also usually the most heavily traded, which provides excellent liquidity and execution when buying or selling.
However, in researching these areas I came across several smaller ETFs that have surpassed their more established peers in 2014 and may warrant a second look if you are considering alternative income sources.
Master Limited Partnerships
In the world of master limited partnership ETFs, the Alerian MLP ETF (AMLP) is the reigning king. This fund has nearly $8 billion invested in a relatively concentrated portfolio of 25 holdings and pays a yield of 6.21%. So far in 2014, this ETF has increased 2.4% on the back of strong support for oil and natural gas prices.
One worthy competitor to AMLP is the First Trust North American Energy Infrastructure Fund (EMLP) which is an actively managed ETF with a more diversified base of 55 energy companies in its portfolio. EMLP has jumped nearly 6% this year due in large part because it has 30% of the portfolio dedicated to traditional utility stocks. The utility sector is the leading market segment so far in 2014 and certainly EMLP has benefited from that exposure.
The one drawback to this difference in underlying holdings is that the yield on EMLP is just 3.21% because it is not fully dedicated to the master limited partnership theme. However, EMLP only charges an expense ratio of 0.95%, which is just a fraction of the hefty 4.85% fee that AMLP charges on an annual basis.