Josh Brown on the markets and MLPs

Josh Brown, The Reformed Broker, is turning fairly cautious on the markets, looking past cyclical sectors to investments that offer superior yields.

And in a MarketWatch interview, he talks about his firm putting conservative clients into master limited partnerships for the first time.

Just what is an MLP?

They are unique securities focused on the oil industry that have the tax benefits of a limited partnership, and typically offer more than double the yield of a 10-year Treasury.

“They are long-term instruments for yield, and it makes sense to look at a pool of the best ones,” says Dan Plettner, manager of the MLP Direct Ownership model at Covestor. “The real caution involved is in choosing specific ones with minimal conflicts of interest, especially involving incentive distribution rights to the general partners. Avoid those, and MLPs are great asset class.”

Here’s what you should know about MLPs, and how they are related to rising oil prices.

It does not necessarily follow logically that MLPs would be correlated with oil. Most MLP investments are in pipeline and transport companies — not oil exploration and production. You would think that a correlation exists between E&P stocks and oil prices, but not with oil and the companies that move oil.

However, some investors have noted a growing correlation between stronger oil prices and MLP returns.

The MLPs might be an asset class to research further if you happen to be a yield seeker, or are becoming a bit more cautious, like Brown.