Investing 27-06-2024 10:02 11 Views

EMO fund is beating S&P 500, Nasdaq 100 in 2024: what next?

American stocks have done well this year, with the S&P 500 and Nasdaq 100 indices soaring by over 15% and sitting at their all-time highs. This growth has been driven by the strong corporate earnings, anticipation of Fed rate cuts, and artificial intelligence, which has pushed companies like Nvidia to record highs.

ClearBridge Energy Midstream Opportunity Fund is doing well

Still, a small fund most people have never heard of is outperforming the mainstream S&P 500, Dow Jones, and Nasdaq 100 indices. The ClearBridge Energy Midstream Opportunity Fund (EMO) has been a top-performer this year.

Its total return year-to-date stands at 17.50% while the SPY and QQQ have jumped by 15.50% and 17%, respectively. It has risen by over 48% in the past 12 months while the two have jumped by 28% and 35%, respectively. Similarly, as shown below, the fund has risen by 118% in the past three years while the other two have gained by 33% and 38%.

EMO vs Nasdaq 100 vs S&P 500 

The EMO Closed-End Fund has done this well even though it invests in an industry that has come under intense criticism by climate change activists in the past decade. 

EMO invests in MLPs

Unlike the S&P 500 and Nasdaq 100 that invest in technology companies, EMO invests in companies in the energy sector. Precisely, it allocates funds to 45 companies that gather, process, transport, and store crude oil, natural gas, and other petroleum products.

These companies are unique in that they operate using a partnership model, which is different from LLCs. As a result, they tend to have some tax advantages since their income is is tax-deferred. They are pass-through entities and their investors are treated as if they directly earned the income.

The EMO fund has invested in most MLP companies listed in the US, with the biggest ones being Energy Transfer, Targa Resources, Oneok, and Enterprise Products Partners. Other notable names in the fund are Williams, Enbridge, and Western Midstream Partners.

Most of these companies have done well in the past few years. Targa Resources stock has risen by almost 50% this year while Western Midstream is up by 48%. The other top-performing companies in the fund are Energy Transfer (which Bill Gross loves), Oneok, and Plains All American Pipeline.

These companies have more upside as energy prices remain at an elevated level. Brent, the global oil benchmark, has remained above the support level at $80 for most of the year. While supply is rising, there are signs that demand is still strong internationally. The estimate is that oil demand will rise by over 1 million barrels this year.

The biggest risk is in natural gas, which has crashed by double-digits after peaking when Russia invaded Ukraine. This performance could affect MLP companies with an exposure to natural gas. 

The fund has other risks. For one, it constantly trades at a discount to its net asset value (NAV). At the time of writing, it had a discount of 12.68%. Also, it is a highly expensive fund to own since it has a gross expense ratio of 4.75%.

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