MLP ETFs for Alternative Income, Yields Over 6%
October 19th, 2012 at 9:18am by Tom Lydon
With investors looking at paltry yields in the fixed-income market, master limited partnership exchange traded funds have garnered greater attention as an attractive source of income and a portfolio diversifier.
“Investors continue to migrate to the ETF asset class, and we are big fans of energy MLPs,” Bruno del Ama, co-founder and CEO of Global X, said in an interview with The Energy Report. “Energy transportation is an infrastructure play with a couple of benefits. First, it provides significant diversification to complement investors’ portfolios; second, it provides income in a low-interest rate environment.”
While investors can pick and choose individual MLP securities, MLP ETFs provide a broad, diversified exposure — investors would have to invest in more than one MLP to gain similar benefits. [MLP ETFs Offer Yield and Long-Term Value]
“These infrastructure, toll-type investments tend to have low correlations to the general economy and the equity markets,” Bruno del Ama added in the Energy Report interview. “They are nice diversifiers in portfolios.”
Moreover, MLP ETF investors do not need to fill out K-1 forms on their tax returns. Instead, they would only receive a simple 1099 form. However, MLP ETFs will come with corporate taxes for capital gains inside the ETF.
According to U.S. federal law, MLP ETFs, which are registered as a regulated investment company, cannot have over 25% of its portfolio in MLPs. As such, MLP ETFs fall under a C-corporation designation and collect deferred tax liability.
“Investors need to be aware that when investing in MLP ETFs, mutual funds and closed-end funds, including MLPA, the funds will be paying capital gains taxes,” Bruno del Ama said.
On the other hand, MLP exchange traded notes do not incur capital gains taxes, and they also do not require K-1s. However, ETNs are debt securities subject to the creditworthiness of the issuer. Additionally, after-tax returns may be lower on ETNs than for ETFs since ETNs payments are treated like fixed-income assets.
“So if your effective tax rate is higher than the dividend tax rate, as is typically the case, you will pay higher taxes on income distributions from an ETN versus an ETF,” Bruno del Ama said.
For qualified accounts, like 401(k)s and IRAs, investors may use MLP ETFs, whereas you can not get direct access to individual MLPs in these investment accounts.
Some MLP ETFs include:
- ALPS Alerian MLP ETF (NYSEArca: AMLP): 6.02% yield
- Yorkville High Income MLP ETF (NYSEArca: YMLP): 7.72% 30-day SEC yield
- Global X MLP ETF (NYSEArca: MLPA): 6.07% 30-day SEC yield
MLP ETNs include:
- UBS E-TRACS Alerian MLP Infrastructure Index (NYSEArca: MLPI): 4.80% yield
- Credit Suisse Cushing 30 MLP Index (NYSEArca: MLPN): 5.42% yield
- JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ): 4.92%
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.