Energy infrastructure continues to play a critical role in the reshoring of American industry. As demand for reliable, 24/7 power rises—driven by AI, chip manufacturing, and data center expansion—so does the need for natural gas and the pipelines that move it. The Westwood Salient Enhanced Midstream Income ETF (ticker: MDST) is designed to capitalize on the power demand surge through a portfolio of midstream energy equities with a disciplined covered call overlay.
In an interview with The Wealth Advisor’s Scott Martin, Parag Sanghani, SVP and Senior Portfolio Manager at Westwood, discussed the fund’s active approach to generating monthly income and navigating the evolving midstream opportunity set. “We looked at the landscape where we were today and said, we believe there’s a lot of opportunity investing in the buildout of the American capex cycle or the Renaissance in industrial production that should be coming over the next 10 to 15 years,” Sanghani says.
Investing in the Infrastructure Powering AI and Onshoring
A wave of capital investment in U.S.-based manufacturing is transforming the country’s energy demands. New chip plants and hyperscale data centers require immense, uninterrupted power—most of it delivered via natural gas. MDST concentrates on companies enabling the energy shift: operators of pipelines, storage facilities, and other infrastructure essential to energy transmission that generate predictable, fee-based revenue.
“We’re bringing a lot more chip manufacturing back to the United States, a lot more data centers,” Sanghani explains. “All of those require a lot of energy.” The strategy behind MDST emphasizes those companies enabling that energy delivery—not the producers but the operators that transport and store natural gas and related liquids.
With most midstream names yielding between 5% and 5.5%, he notes, the fund seeks to enhance that baseline through an active options overlay, aiming to deliver high distributable income without taking on excessive equity risk.
A Covered Call Strategy Built for Volatility
To increase income potential beyond dividends, MDST employs a covered call overlay. “We write it on individual securities, and we write them typically one to two months out into the future,” Sanghani says. “What that does is it allows us to manage which securities are being overwritten and which securities are going to generate hopefully the best total income for the portfolio over a one-, two-, three-year period.”
Many managers find quarterly index-level options writing simpler since it requires only four transactions per year. But as Sanghani notes, MDST’s short-term, out-of-the-money options on individual names give the managers flexibility to make tactical adjustments and react to how those securities are moving.
“We believe instead of doing it quarterly, you do it monthly, and doing it on individual stocks, you get paid more than doing it on an index level because individual stocks can be more volatile than an index,” he says.
Citing Westwood’s extensive experience with both the energy infrastructure space and derivatives, Sanghani explains, “We’re familiar with how the market works within the midstream industry for options, and we are comfortable looking at the opportunity set and saying, what we’ve seen over time is that you may have a little bit less volatility for the portfolio because of those options that can generate income and you get to participate with some of the upside.”
A Research-Driven, Houston-Based Team
Westwood’s six-person investment team in Houston brings two decades of midstream experience to MDST. Their deep knowledge of the sector enables them to differentiate between business models that appear similar on the surface but operate under entirely different pricing, risk, and regulatory regimes.
“The industry is highly nuanced if you are an operator of short-distance pipelines versus interstate pipelines, oil pipelines versus natural gas pipelines, storage facilities, et cetera, export facilities,” Sanghani says. “So, a lot of work goes into understanding how it is the companies are actually making money.”
By staying close to operators and market specialists, the team evaluates both the fundamentals of each company and the broader economic shifts reshaping energy use. One key trend is the rising demand for U.S. natural gas, driven by both domestic energy users and international buyers through liquefied natural gas (LNG) terminals.
“We’re seeing a significant buildout on that front,” he adds. “All of that requires a lot of pipeline infrastructure, and that growth acceleration can create a lot of opportunity for both investors and companies.”
Natural Gas, Not Oil, Drives the Growth Thesis
While the midstream space was once closely tied to oil prices, correlations have shifted as natural gas and natural gas liquids—such as butanes and ethane, used for heating and plastics—become central to the industry’s revenue, with utilities and emerging markets seeking lower-carbon energy sources.
“Ten years ago, the story was oil,” Sanghani observes. “We’ve seen oil go down in the industry, move higher because the cash flows from the industry are generated predominantly with non-oil commodities.”
Natural gas is displacing coal in many power grids, both in the U.S. and abroad. As the world’s lowest-cost LNG exporter, the U.S. is uniquely positioned to meet rising demand.
“When we sell U.S. natural gas to countries like South Africa, that is going to directly offset the use of coal power generation,” Sanghani explains. “The United States has seen a reduction in carbon emissions because of more natural gas, less coal usage.”
For advisors with ESG-focused clients, MDST may offer a rare combination: exposure to a growth-oriented energy theme with a smaller carbon footprint than traditional fossil fuels.
Identifying the Right Companies—and Avoiding the Wrong Ones
In the face of surging demand from AI, data centers, and onshoring chip manufacturers, many midstream companies are expanding infrastructure, but not every capital expenditure results in attractive returns. Sanghani emphasizes the importance of selecting operators with financial discipline.
“There are some companies that are overspending relative to their cashflow being generated,” he points out. “Those are companies you want to avoid. And there are companies that are being thoughtful about their balance sheet.”
Some pipeline operators are facing a decision point: continue upgrading existing systems with compression stations or commit to entirely new pipelines at significantly higher cost. Sanghani notes that a single station may cost $200 million and support a modest increase in tariff revenue, whereas a new pipeline could require billions in capital—and justify much higher tolls.
Changing capital needs and regulatory environments can alter project returns significantly. MDST seeks to invest in companies that strike the right balance between expansion and sustainability.
A Tax-Aware, Income-Enhancing Addition to Model Portfolios
Unlike traditional MLP vehicles, MDST avoids K-1 tax forms and offers simplified reporting. K-1 tax forms are not provided to ETF investors, but are instead received by the fund on the underlying investments.
Additionally, some of the portfolio’s monthly distributions may be classified as return of capital, potentially lowering investors’ annual tax burden. “The dividend payout or the actual distribution may help reduce taxes,” Sanghani says. “Distributions won’t all be reportable as taxable income to the investor. There is a portion of it that is return of capital. From year to year, it will vary, but it won’t be all fully taxed.”
Advisors are incorporating MDST in different ways. For some, it functions as an income sleeve within a 60/40 allocation. Others see it as an equity enhancement tool for yield-seeking clients. Either way, the strategy offers flexibility.
“What we’re finding is that it’s creating optionality for advisors when it comes to the whole portfolio mosaic,” Sanghani explains. “Adding a little bit of MDST can give you both equity exposure and yield exposure.”
As traditional equity exposure delivers lower dividend yields, MDST may offer a way to improve total portfolio income without shifting heavily into lower-rated debt or more volatile alternatives.
A Targeted Approach to Energy Income
MDST seeks to address a growing need among income-focused investors: access to stable infrastructure cash flows and equity exposure with monthly distributions and reduced volatility. The fund combines a fundamental research framework with a consistent, disciplined options strategy that aims to reward investors over a multi-year horizon.
“I believe it’s a great time to be invested in American energy,” Sanghani says. “And MDST really does, in our opinion, do a great job of giving you that exposure while at the same time capturing the yield that’s in the space.”
For financial advisors searching for a way to tap into the U.S. energy infrastructure buildout—without the commodity exposure or tax complexity—MDST may be a fund worth evaluating.
__________________________
Additional Resources
__________________________
Definitions
CapEx (Capital Expenditures): CapEx refers to money a company spends on acquiring, upgrading, or maintaining physical assets such as buildings, equipment, or technology. These investments are intended to improve the company’s long-term performance.
Covered Call: A covered call is an options strategy in which an investor sells a call option on a security they already own. By selling the call, the investor collects a premium (income) from the option buyer. If the underlying security’s price stays below the strike price, the investor keeps both the premium and the security. If the price rises above the strike price, the investor may be required to sell the security at that price, potentially limiting upside gains.
ESG (Environmental, Social and Governance): ESG refers to a set of standards for how a company operates in terms of environmental impact, social responsibility, and corporate governance. Investors may use ESG criteria to evaluate potential investments.
Income: Income refers to the earnings generated by an investment over a period of time. This may include interest payments, dividends, or other cash distributions paid to investors.
Income Sleeve: An income sleeve is a designated portion of an investment portfolio that is allocated to investments intended to generate regular income.
K-1: A Schedule K-1 is a tax document used to report each investor’s share of income, deductions, credits, and other items from certain types of investments—such as partnerships, limited liability companies (LLCs), and some trusts. Investors in certain funds, such as master limited partnerships (MLPs), may receive a K-1 instead of a Form 1099. The K-1 is typically issued annually and is used for preparing personal income tax returns.
LNG (Liquefied Natural Gas): LNG is natural gas that has been cooled to a liquid state for easier storage and transportation. It is used as a fuel source in energy production and heating.
MLP (Master Limited Partnership): An MLP is a business structure commonly used in the energy sector that combines the tax benefits of a partnership with the liquidity of publicly traded securities. Investors in MLPs typically receive regular income distributions.
Option: An option is a contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset—such as a stock, exchange-traded fund (ETF), or index—at a specified price (the strike price) within a set time period.
Volatility: Volatility refers to the frequency and magnitude of price movements—up or down—in a security or market index over a given period of time.
Disclosures
MDST Top Ten Holdings:
- Energy Transfer (ET) – 8.60%
- Enbridge Inc (ENB) – 8.46%
- Williams Cos Inc (WMB) –7.58%
- Kinger Morgan IN (KMI) –7.21%
- Enterprise Products (EPD) – 6.45%
- Hess Midstream-A (HESM) – 5.30
- Oneok Inc (OKE) – 5.14%
- TC Energy Corp (TRP) – 5.04%
- South Bow Corp (SOBO US) – 4.81%
- DT Midstream (DTM) – 4.78%
To determine if this Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s prospectus which may be obtained by downloading at westwoodetfs.com or calling (800) 994-0755. Please read the prospectus carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC. Northern Lights Distributors, LLC and Westwood Holdings Group, Inc. are separate and unaffiliated.
Westwood ETFs does not provide tax advice. Please consult your tax advisor before making any decisions or taking any action based on this information.
Exchange Traded Funds (ETFs) are subject to market risk, including the possible loss of principal. The value of the portfolio will fluctuate with the value of the underlying securities. ETFs trade like a stock, and there will be brokerage commissions associated with buying and selling exchange traded funds unless trading occurs in a fee-based account. ETFs may trade for less than their net asset value. Investing in ETFs may not be suitable for all investors. ETFs are subject to loss of principal and there is no guarantee the holdings will continue to pay dividends.
Covered call strategy risk arises when an investor holds a long position in a stock and simultaneously sells a call option against it. While this strategy can generate income, it limits potential upside gains if the stock price rises significantly above the strike price of the option.
Options risk refers to the inherent risks associated with trading options, such as the risk of losing the entire premium paid for an option if it expires out-of-the-money.
The Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase price fluctuation. The value of commodity-linked investments such as the MLPs and energy infrastructure companies (including midstream MLPs and energy infrastructure companies) in which the Fund invests are subject to risks specific to the industry they serve, such as fluctuations in commodity prices, reduced volumes of available natural gas or other energy commodities, slowdowns in new construction and acquisitions, a sustained reduced demand for crude oil, natural gas and refined petroleum products, depletion of the natural gas reserves or other commodities, changes in the macroeconomic or regulatory environment, environmental hazards, rising interest rates and threats of attack by terrorists on energy assets, each of which could affect the Fund’s profitability.
MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. If an MLP were to be obligated to pay federal income tax on its income at the corporate tax rate, the amount of cash available for distribution would be reduced and such distributions received by the Fund would be taxed under federal income tax laws applicable to corporate dividends received (as dividend income, return of capital or capital gain). Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Such companies may trade less frequently than larger companies due to their smaller capitalizations, which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The tax benefits received by an investor investing in the Fund differs from that of a direct investment in an MLP by an investor. This document does not constitute an offering of any security, product, service or fund, including the Fund, for which an offer can be made only by the Fund’s prospectus. No fund is a complete investment program, and you may lose money investing in a fund. The Fund may engage in other investment practices that may involve additional risks, and you should review the Fund prospectus for a complete description.
