Dear Mr. Berko: I was looking at the Yorkville High Income MLP ETF, which is an energy-related issue that has fallen almost 50 percent in value from its high price but yields a very good 14.2 percent. Though the value of this exchange-traded fund is down a lot, its dividend has fallen only a little bit. This makes the stock look attractive.
I was thinking of investing about $19,000 and buying 2,000 shares of this ETF, but my broker wants me to wait. He figures that it will reduce the dividend again (it reduced it once) and that then might be a better time to buy the ETF.
Well, I don’t think it will reduce the dividend again, so I asked whether it would be smart to buy 1,000 shares now and then wait until the future of the dividend is clear to possibly buy the other 1,000. But he’s adamant that this is not the right time to buy this Yorkville ETF. He tells me to be patient, that it will fall to $8, and he insists the dividend will be cut.
Your thoughts would be appreciated.
— FL, Vancouver
Dear FL: Listen to your broker, who seems to be all wool and a yard wide. Now that Iran can sell its oil production, most energy stocks probably will be heading lower. That’s common sense. So you, FL, must have fallen into the gene pool while the lifeguard wasn’t watching.
The Yorkville High Income MLP ETF (YMLP-$9.33) traded at a high of $18.92 in July 2014, just 28 months after its initial public offering at $11.25. This ETF manages a $260 million portfolio (it used to be $460 million) of companies that have been taking the pipe since the price of oil tanked. There are some 40 energy-related issues in YMLP’s portfolio, a few of which have cut their dividends and more of which will definitely do so in the coming months.
And I guarantee it.
What is YMLP?
YMLP is managed by Solactive, a fancy German ETF management company that has constructed its own proprietary stock indexes. Solactive, which brought YMLP (and other similar ETFs) public, has developed a set of quantitative algorithms that determine the composition of its MLP index at predetermined intervals.
It appears that the Solactive folks in Frankfurt actually believe their own hype, which works well in an ascending market but fails miserably in a descending market. You’d laugh yourself silly at some of the ETF trash these Solactive quants have brought to the market.
This hocus-pocus, abracadabra and shazam algorithm stuff makes for good press but lousy performance. During the past year, Solactive’s algorithms failed miserably, and YMLP crashed. It lost 50 percent of its value in less than a year, and its largest portfolio positions — EV Energy Partners, Navios Maritime Holdings, Atlas Resource Partners, Teekay Offshore Partners and Golar LNG — lost as much as 65 percent of market value. Resultantly, the market value of YMLP imploded, and the safety of its current 14.2 percent dividend isn’t worth the risk.
Common sense suggests that YMLP’s current $1.40 dividend will be cut, several times and sooner rather than later.
All of the 40 energy-related stocks in YMLP’s portfolio are down significantly. And a glimpse of these positions shows: 1) All the issues have fallen in value by at least 40 percent. 2) Revenues of these companies are down between 25 and 60 percent. 3) Earnings have collapsed, and many issues are reporting quarterly losses. And when revenues fall and earnings collapse, the dividend usually suffers and the stock’s price declines.
The talk suggests that YMLP’s share price could fall to $8 and that the dividend may be cut to 80 cents a share, which would be a 10 percent yield. And if the price of oil steadies at $60-$65 a barrel, the master limited partnerships in YMLP’s portfolio could regain some of their past momentum. So listen to your broker and place an open order to purchase YMLP in the low $8 range. If the consensus is correct, YMLP could be a $12 to $13 ETF by this time next year.
