Infrastructure Power Plays: MLPs, Electrification & Quality Dividends in the Small Cap Universe

So unlike dividend strategies that are just focused on yields across the entire market landscape and then giving those stocks various various weights based on what their yield is, all of the stocks in ESTOG get the exact same weight, five from each sector. >> Welcome to the program.

I'm Thalia Hayden.

It's great to have you with us.

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Now, let's welcome Paul Bayaki with SSNC Alps Advisors.

Paul, thank you so much for being here. >> Great to be here.

Always good to see you, Thala. >> Same.

Well, as you know, global electricity demand is dramatically increasing and impacting all business sectors.

What does this mean for investors and how does the Alps Electrification Infrastructure ETF ticker ELFY otherwise known as Elfie provide investors with exposure to this important mega trend?

Well, I think it's important to understand what's driving rising electricity demand.

So, a lot of the news flow recently has been around AI data center investment and the massive electricity appetite that AI data centers have.

And naturally, the companies who are investing the most capex to build those AI data centers are the companies that already dominate your equity portfolio.

The hyperscalers, the mag 7 companies and the companies who stand to benefit from the rising electricity demand coming from AI data center investment aren't the companies that you own a lot of in your equity portfolio.

Certainly not in a cap weighted manner.

And beyond the AI data center story which is again dominating headlines their consumer level trends whether it be switching from ICE to EVs and then switching from things like gas gas stoves to induction stoves that also is driving rising electricity demand at the margin.

And then you add another layer from a policy perspective of the reshoring, the massive investment from foreign companies to build manufacturing capabilities or bring back manufacturing capabilities to the United States.

That's going to put additional strain on our electricity networks and our electricity grid.

And so you add all of these things up and your forecast depending on what you look at is for an increase of electricity demand of 3% annually over the course of the next decade and beyond at coming off of a period where we grew electricity at point4% annually.

So you're talking about a meaningful increase in electricity demand coming from all of these different sources.

And getting back to the idea that utilities, for example, which are the the way in which most people get access to electricity, unless they're doing a behind the meter deal or they're off the grid, that's a segment of the market that's 2 and a half 3% of the S&P 500.

The companies who are mining for copper and the other metals who are critical to the implementation of this massive infrastructure buildout, material sector is two or 3% of the S&P 500.

And then you think about energy infrastructure.

The companies who own the pipelines who ensure that natural gas gets from where it's produced to where it's consumed, which is increasingly at utilities and at gas turbines built by companies like GE Vernova.

Those aren't companies that dominate your equity portfolio.

So in many ways, it's about distinguishing between who's driving rising electricity demand and who stands to benefit from it and then ensuring that the portfolio that you build of beneficiaries is textured.

And that's what Elfie does.

It pulls from 18 different sub subindustries, five different sectors of the market, including materials, utilities, industrials, as well as energy and technology.

But it does so focused specifically on companies with more than 5 billion in market cap, a minimum ADV or average daily dollar volume.

So that you're not just buying pre-p profofitability companies necessarily.

You're buying companies of a certain scale pulled from industries specifically earmarked to benefit from rising electricity demand and that's what Elfie promises to do and that's ultimately how Elfie was built. >> Okay, that makes sense.

Well, Paul, investors are discovering new ways to supplement fixed income yields in their portfolios.

One of the ETFs highlighted in a research piece at Alpsfunds.com was the Alp Sector Dividend Dog ETF, ticker SOG.

Can you tell us more about SS DOG's unique dividend income strategy? >> Yeah, so ESTOG is kind of old school in the sense that first and foremost, it predates a lot of the massive growth we've seen in the ETF market.

We're on pace for another record year of launches.

We're on pace for another record year of flows, on pace for another record year of volumes.

But SDOG's been around for a while.

And the methodology pulls from one of the the oldest Wall Street investment strategies which is the dogs of the Dow theory.

And the old dogs of the Dow theory said of the 30 stocks in the Dow industrial average you pick the five highest yielding stocks at the beginning of the year and mean reversion plays out and those stocks can provide relative outperformance.

But because this is a 40act mutual fund bound by some of the diversification requirements, you can't just pick five stocks from the Dow Jones Industrial Average and equally weight them.

You would run a foul of all of the rules regarding diversification.

And so what ESTOG does is it takes 10 of the 11 gig sectors excluding real estate, picks the five highest yielding stocks in each of those sectors at the beginning of the year and equally weights them.

So unlike dividend strategies that are just focused on yield across the entire market landscape and then giving those stocks various various weights based on what their yield is, all of the stocks in ESTO get the exact same weight, five from each sector.

You have equal weight to every sector in the market.

And so it has a cyclical value orientation.

It brings down your exposure to technology, as you can imagine, dramatically from north of 30% of the S&P 500 by weight down to around 10% by weight.

But also importantly, the companies that you own are companies with relatively high dividend yields.

And in a market that has so rewarded the dominant companies in the market, the Mag 7, the hyperscalers, which we talked about in the la the last segment, this portfolio has a lot more balance to it from a sector perspective. pivot certainly on on balance has a higher yield than most cap weighted views of the US equity market but also has a significant value orientation which although over the course of the past 101 15 years value has underperformed growth on a fairly consistent basis outside of some head fakes on a go forward basis if we get a return to a value orientation or value leadership in the market SDOG is positioned to benefit from that given its value orientation and the relatively high dividend yield. >> Good to know.

Despite share price volatility, Paul MLPS continue to deliver compelling yield income.

The MLP ETF, ticker AMLP, and the Alpsan Energy Infrastructure ETF, ticker ENFR, both target this area, but in different ways.

What's the latest with the MLP market?

Yeah.

So, as we were talking about the electrification theme earlier, we've been talking a lot about AMLP and ENFR as adjacencies to the AI story because if you look at the United States, about 42% of our electricity comes from natural gas is generated by natural gas.

And these are the companies that own the pipelines, the processing, the storage facilities for both natural gas and crude oil.

And they're important infrastructure assets. they have in many cases regional influence because it's really difficult to build a new pipeline in the United States from a regulatory perspective or otherwise.

We're also really well plumbed or really well piped meaning we've we've gone about building a lot of the infrastructure over the course of the past 10-15 years to support all of the production that's grown in the various basins around the United States.

The energy infrastructure industry as a whole is very unique even within the energy sector.

This is a feebased business model where they make fees based on how much volume they transport, they store, they process.

Unlike most of energy which is either based on a spread between what you pull it out of the ground for and what you're able to sell it on for, or in the servicing side of the business, really dependent upon growing production.

And so it's very different from its risk return profile from other pockets of energy.

But it's also importantly a pocket of the market that has typically provided really strong relative yields.

And the difference between AMLP and ENFR is that AMLP, which is our f flagship product.

It's the largest, most liquid MLP ETF on the market, only owns master limited partnerships.

And in so doing, it's a somewhat limited view of the entire energy infrastructure industry.

It does orient towards crude oil activities than it does natural gas activities.

If you look at ENFR, it combines MLPS with CC corps.

And that means that you get much more comprehensive exposure to the overall energy infrastructure industry.

And the difference is going to be the relative yield of those two portfolios.

ENFR typically carries a lower yield around 200 basis points less than AMLP.

AMLP is a product people have come to for yield historically, but to play on the natural gas theme, meaning you're looking at the increasing demand for electricity and you're mapping that to perhaps increasing demand for natural gas both domestically and as we increase our capacity to export LNG to other markets around the world, those companies in ENFR tend to tilt a little more toward natural gas. 70% or so of the revenues in EFR tied to natural gas activities, whereas it's closer to a 5050 split in AMLP.

So, it's really about what your objectives are.

If you're trying to maximize yield, if you're trying to play on the longer term increase in electricity demand, that will be those will be important considerations for advisers and investors looking at AMLP versus ENFR.

But we think both of them are important portfolio diversifiers considering how small a slice energy is now of the S&P 500, 3% or so of the S&P 500 by weight, how small midstream is even within the energy sector in the S&P 500, how little exposure so many investors have to the energy infrastructure space, but also how important a role these companies are likely to play in the electrification theme as well. >> Got it.

Makes sense.

Now Paul, given the recent bounce in US small caps, how has the Alps OShares US small cap quality dividend ETFs quality dividend strategy influenced its relative performance and risk profile? >> Yeah.

So if you look at the the bottom that was reached off of the Liberation Day tariff impact on the market right around April 9th, April 10th, small caps had a really violent rally off of that bottom.

But interestingly, the company the worst companies in that index, the companies that don't make money have been leadership.

In fact, if you just do a chart of the companies that generate profits versus the companies that don't generate profits in the Russell 2000, and remember about 40% of the Russell 2000 is not profitable.

It's been the unprofitable companies that have been leadership.

And that's weighed on O USM's relative performance because O USM is designed to focus on exclusively companies that generate profitability as measured by ROA without excess leverage and not only pay a dividend but grow a dividend and have well covered dividends and that is not what has been rewarded in this rally so far in 2025 in the small cap universe.

Our argument is even though from a relative performance perspective O USM has lagged the index as measured by the Russell 2000, the design of OSM is to provide a durable consistent riskadjusted performance profile over long periods of time because of its focus on highquality companies with highquality dividends.

And even if the rally that we've seen so far off of the the bottom from liberation day has largely been led by the lowest quality companies in that segment of the market.

History tells us that owning highquality companies in this segment of the market is a way to ensure that your draw downs are typically shallower, your risk adjusted performance has been significantly better than that of the overall index.

And so in many ways it's it's a situation where you don't necessarily want to throw the baby out with the bathwater as it were when you're thinking about small caps.

We we do continue to be constructive on small caps in terms of the outlook for their relative performance as the Fed continues to ease, but just because you've seen leadership from lowquality companies in the universe doesn't mean that's likely to persist over the long term.

And that's why O USM was designed to be a long-term strategic allocation, not a tactical allocation. >> Great timely information, Paul.

We've certainly learned a lot.

But one thing to note before you take off, searching for ETFs, it can be overwhelming and timeconsuming.

The good news is advisers and ETF investors looking for a specific investment solution can find what they're looking for quickly at Alpsfunds.com.

Can you tell us more about that?

Yeah.

So, if you go to Alpsfunds.com and you're clicking under our funds and you go to ETFs, what you'll notice is we have a wide range of ETFs that we offer in various segments of the market.

And instead of scrolling through all of them, you can easily filter by solution type.

So, AI adjacencies, electrification, inflation, real assets are examples of ways in which you can search by solution.

You can also screen for or filter by investment style, whether it's an active or a passive strategy.

And we found that that's helpful for advisors to get to the objectives that they're trying to search for in a fairly fluid way.

And we're actually in the process of making enhancements to the search function within our website, which will allow you to automatically filter that list by certain keywords, which will enable advisors and investors coming to Alpsfunds.com to be a little bit more efficient in their search process as well. >> Nice.

Yeah, I've noticed it's an easy site to navigate.

Thank you so much, Paul, for your insights again.

Keep up the great work. >> Thanks, Dia.

Always good to see you. >> Same.

And as he said, be sure to visit alpsfunds.com to learn more about the ETFs we discussed along with the rest of their ETF lineup.

Feel free to check out their tools and ETF perspective.

I'm Thalia Hayden with ETF Guide.

Thanks for watching and we'll see you next time.