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The energy industry has been relatively volatile in the past few months. After soaring to a multi-month high of $95, the price of Brent has moved into a bear market by falling to $75 a barrel. West Texas Intermediate (WTI) price has also dropped to $72. This article will compare MLPA and VDE, two of the best-known energy ETFs.

The Global X MLP ETF (MLPA) is a fund that invests in companies known as MLPs. These are unique firms that operate as partnerships. As a result, unlike oil companies like Exxon and Chevron, these firms don’t pay income tax, which ensures that they pay a higher dividend. 

MLPs play a very important role in the energy industry. They are involved in several areas, including gathering, compression, treating, processing, storage, and transporting of oil and natural gas. Most of these firms run thousands of miles of pipelines across the United States. They also own giant terminals in key areas of the US.

Investors love MLPs for two main reasons. First, they usually have higher dividends than other companies in the energy companies. For example, the MLPA ETF has a dividend yield of over 7% while the general VDE fund yields just 3.62%.

Second, these companies tend to be uncorrelated with energy prices because of how they make money. Their performance is not tied directly to oil and natural gas prices since they are paid based on volumes.

The MLPA ETF has invested in the biggest MLP companies in the United States like Energy Transfer, Enterprise Product Partners, MPLX, Western Midstream, and Cheniere among others.

The MLPA is a good ETF in that it provides investors with access to the biggest American MLPs. However, I believe that the Vanguard Energy ETF (VDE) is a better investment even with its smaller yield.

First, the VDE ETF has historically outperformed the MLPA. The chart below compares the total returns of the two ETFs in the past five years. While the two have been in the green in this period, the VDE fund has done better overall.

Second, the VDE ETF is made up of companies across all areas of the energy sector. Most of the firms are in the integrated oil and gas followed by those in exploration and production. It also has companies in the coal industry, equipment and services, and storage and transportation. 

Diversification is the main reason why people invest in ETFs. As such, while the MLPA ETF is diversified, it is in a single sector, which is a bit risky. In most cases, MLP stocks tend to move in the same direction.

Third, VDE is a cheap energy ETF to invest in. It has a small expense ratio of just 0.10% while MLPA has a ratio of 0.45%. This is a big spread, especially when you are investing more money in the fund. These costs can add up over time. 

The post 3 reasons why the VDE ETF is much better than MLPA appeared first on Invezz

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