Want to share a great article written by Rida Morwa on AMZA - on Seeking Alpha

Summary

InfraCap MLP ETF is an actively managed Exchange Traded Fund focused on the Midstream Oil & Gas MLP space. The managers are Infrastructure Capital Advisors.

AMZA is a relatively new ETF which started trading in late 2014. The ETF currently yields close to 20%.

After a period of underperforming the infrastructure index AMLP in 2015, AMZA has been an outperformer.

Over the past 3 months, AMZA achieved 38% total returns compared to 25% for the Alerian ETF, AMLP.

A close look at this misunderstood ETF.

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Source

Outlook for Oil and Gas MLPs

This is a follow up on a recent report posted on Seeking Alpha on the outlook of global oil supply and demand trends over the next 5 years. The report also includes the outlook and valuations for the largest oil & gas MLPs.

The conclusion of the report:

"Despite the recent price rally in the oil and gas MLP space, the sector remains severely undervalued. The large MLPs have a 40% to 75% upside which can be achieved over the next two to three years, in addition to the hefty distribution yields averaging around 10%."

For those who did not get a chance to read it, the following is the link: Master Limited Partnerships - Why The Current Rally Is Just The Beginning

InraCAP MLP ETF (NYSEARCA:AMZA)

InfraCap MLP ETF is an actively managed Exchange Traded Fund in the Oil & Gas MLP space, managed by Infrastructure Capital Advisors. The Fund is invested primarily in the U.S. midstream energy infrastructure sector.

The ETF is relatively new and started trading on the New York Stock Exchange in October 2014, around the time when Oil & Gas MLPs were under severe selling pressure. The total assets of this ETF amounted to around $42 million. AMZA trades based on its Net Asset Value (NAV), which is reported on a daily basis by its manager.

The ETF pays $2.08 per share yearly, which gives it a yield close to 20%.

Holdings

This ETF invests primarily in first class oil and gas MLPs with the following characteristics:

1. Investment grade credit.
2. Stress tested to perform well regardless of oil prices.
3. History of earnings growth.
4. History of dividend growth.
5. Full cycle companies which can thrive in different phases of the oil cycle.

If we take a close look at the top holdings of AMZA, we find they are the same as those of the ALPS Alerian MLP ETF (NYSEARCA:AMLP); however, the weightings are different. The current top 10 holdings of AMZA are the following:

An actively managed strategy

AMZA is an actively managed ETF. Therefore, it provides more added value to investors. The following is the strategy used by its manager to maximize income and growth:

1. Flexible allocation: AMZA managed to build a model to track MLPs that are undervalued or those with the best upside potential. They have flexibility to allocate investments to those companies that are best poised to outperform. For example, they outweigh those companies who will benefit from mergers and acquisitions, or those which become severely oversold. AMZA management increased allocation on Energy Transfer Equity (NYSE:ETE) when the stock collapsed last February to the price of $4/share. ETE trades today close to $13/share. Finally, AMZA has a unique advantage because it can add the General Partners (NYSE:GPS) of MLPs (Parent Companies of MLP companies) to their portfolio holdings. The General Partners also pay high distribution yields and many are not Master Limited Partnerships. GPs are added to the portfolio using an opportunistic strategy.
2. Use of leverage: AMZA has the flexibility to use leverage with a target of 20% to 25%. The added leverage helps the ETF to capture higher distribution yields paid by the underlying companies. This also enables it to pay shareholders higher distributions.
3. Writing covered calls: Finally, AMZA management uses a covered-call strategy to boost income. Covered calls can help reduce the ETF volatility during market turbulence. Also covered calls can be a good source of income during periods of price stability.

Why did AMZA underperform AMLP in 2015?

Based on an exclusive interview I had with the managers of the ETF, "Infrastructure Capital Management," AMZA seeks to pay a steady distribution of around $2.08/share per year (current yield 20%) and to keep a stable Net Asset Value. It seems that management seeks to achieve this return based on the following sources of income:

1. The distribution yield of the underlying stocks, which currently comes to 9%.
2. A 1.5% extra income from leverage.
3. Writing covered calls, which can possibly achieve around 2% return when the markets are not volatile.
4. It seems that management seeks to fund the shortfall of 6.2% from capital gains achieved on the underlying holdings to shareholders.

At first glance, the strategy used by the ETF seems logical, since most companies held in the portfolio are growing at a rate of 6% or more annually.

However, the fixed distribution, "regardless of the performance of the underlying portfolio," puts the performance of the ETF at risk during severe market downturns. This is exactly what happened in 2015. As the underlying stocks kept falling, the ETF had to sell a part of its holdings at low prices in order to return a steady distribution yield to shareholders. This led to a deterioration of NAV, which is the main reason why AMZA has underperformed AMLP.

Note on the 20% yield

AMZA pays to investors an amount of $2.08/share every year. This comes to 19.7% yield. On certain finance websites, the yield shows as 11.69%. This would be the 12-month trailing SEC yield, which is computed by subtracting any "return of capital" to shareholders (Return of Capital represents unearned returns paid to shareholders in the form of distributions).

The 11.69% represents the dividends and income earned by AMZA over the past 12 months, as AMZA paid some "return of capital" to shareholders in 2015; however, no such returns were made during 2016. Therefore, the reported SEC yield is not an indicator of actual distributions (which are 19.7%) or of future performance. I expect AMZA to keep outperforming in the future, as it has done over the past 3 months.

Outperformance of the past 3 months

The strategy used by the ETF has finally paid-off. On a total return basis (including dividend reinvestment), AMZA has delivered almost 38% return over the past three months compared to only 25% return by AMLP.

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Given the bullish outlook in the midstream oil & gas space, AMZA is likely to continue to deliver stellar results. I expect that the 20% yield paid by AMZA can reasonably be achieved by the fund managers and is unlikely to contribute to a reduction in NAV over a horizon of 2 to 3 years.

Simplified Tax Accounting

Like AMLP, AMZA is taxed as a c-corporation. Therefore, investors get the Form 1099 and not K-1. This provides investors with an entry to the oil and gas MLP space without tax complications.

Also for International investors, AMZA is a good alternative to investing directly into MLP stocks, as many non-resident investors have reported that they are getting subjected to a large withholding tax on distributions paid by Master Limited Partnerships - as much as 40%.

Conclusion: AMZA is well positioned for the future

I believe that AMZA started trading in 2014 in the worst environment. Therefore, the past performance does not provide a good base for the great potential of this ETF.

AMZA operates best and outperforms when MLP prices are stable or going up. With quite a positive outlook for this space, AMZA is set to continue to outperform and generate additional returns to investors through options writing and through its opportunistic portfolio management. I believe owning AMZA in addition to AMLP, or as an alternative to AMLP, is a good strategy as it provides a managed aspect to this sector, and is likely to be a highly profitable investment.