The basic energy sector, including integrated oil companies and exploration and production outfits, among others, offers a market-beating dividend yield. Still, savvy investors can find even larger dividends in the energy patch.
That's why so many income-hungry market participants turn to master limited partnerships (MLPs). Look at the Alerian MLP ETF (AMLP +0.53%). One of the oldest and largest exchange-traded funds (ETFs) in the midstream energy category, this fund carries a trailing-12-month distribution rate of 7.7%. That's more than 7 times the dividend yield on the S&P 500 and nearly triple the yield on the largest basic energy ETF.
This ETF significantly boosts the MLP income proposition. Image source: Getty Images.
There's no need to stop at 7.7%. Not when the NEOS MLP & Energy Infrastructure High Income ETF (MLPI 1.12%) sports a distribution rate of 14.7%. For prospective investors, understanding how this rookie delivers that astounding level of income is vital in the evaluation process.
MLPI is a twist on old MLP ETFs
This NEOS ETF, which debuted last December, is a covered call ETF, which explains the sizable yield. That status also underscores the new fund's enviable growth trajectory. After just six months on the market, this fund has already reached $638 million in assets, indicating it is participating in the growth spurt in options income ETFs.
While options income funds are one of the fastest-growing ETF segments, experienced income investors know these products have pros and cons. On the negative side of the ledger, some covered call ETFs, particularly those with seemingly too-good-to-be-true yields, subject investors to the bad form of return of capital (ROC). In some cases, options-based ETFs distribute more capital than the underlying assets earn, essentially returning portions of investors' cash to them. That can lead to steadily and sometimes dramatically declining net asset values (NAVs).
The NEOS MLP ETF is just six months old, so the jury is still out on the fund's NAV erosion mitigation skills, but it's worth noting that several of the issuer's options income ETFs pass the NAV test with flying colors.
NYSEMKT: MLPI
Key Data Points
Second, whether it's energy stocks, another sector, or a broad market index, options-based ETFs are known for capping upside. It's the price of admission investors pay for elevated income. To its credit, the NEOS MLP ETF is trailing the Alerian MLP ETF by less than 100 basis points since the start of 2026.
A potentially wide audience for this ETF
This energy MLP isn't a niche fund. It can be argued that the fund's audience is expansive. Obviously, it may be appealing to market participants who are well versed in the advantages of midstream energy exposure. Likewise, monthly distributions (most traditional MLP ETFs pay quarterly) may be attractive to investors seeking steadier income streams.
This NEOS ETF could also be a consideration for investors looking to offset some of the interest-rate-related disappointment of bonds while commanding higher income and superior upside potential.
This energy income ETF charges 0.68% annually, or $68 on a $10,000 stake. That compares favorably with the category average of 0.9%.
