MLP ETFs Still Have Potential Despite Tax Concerns

November 26th at 6:18am by Tom Lydon

Master limited partnership exchange traded funds have been pushed to the side along with other yield generating assets ahead of the U.S. fiscal cliff and potential tax changes. However, the markets could be overreacting.

The market fear over MLPs stems from concerns that the Obama administration would burden the asset class with additional tax consequences as a result of the country’s burgeoning deficits. [MLP ETFs in Focus After Sell-Off on Yield, Taxes]

However, the higher rates on dividends would not affect MLPs because income generated from MLPs are not considered “qualified” to begin with and therefore did not receive the favorable 15% tax rate.

Any potential changes may not be as severe as many would think, given that both parties support energy independence and that it would be unlikely Congress would add additional constraints on the infrastructure sector, reports Stan Luxenberg for TheStreet.

Moreover, MLPs would still enjoy near-monopoly like operations since the necessary permits to layout the pipelines are hard to come by.

MLPs are pipeline infrastructure operators. As such, they charge oil companies the right to use their pipelines, so MLP revenue is less based on energy prices and more on how much volume flows through. With energy demand rising, usage of the pipelines should continue to rise as well.

“Even during the financial crisis in 2008, the pipeline cash flows increased,” Jeremy Held, director of research of ALPS, said in the article.

Abby Woodham, a Morningstar analyst, recommends the JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ), which has a 4.9% yield. However, exchange traded notes are subject to the credit worthiness of the issuing bank.

Nevertheless, “because you are dealing with JPMorgan, the risk of default is minimal,” Woodham added.

On the other hand, if you are worried about credit risk, there are MLP ETFs available, like the ALPS Alerian MLP ETF (NYSEArca: AMLP), which has a 6.0% yield. However, investment researcher Morningstar was out with a warning recently on AMLP. Morningstar’s caution flag is related to a complicated tax issue associated with MLPs. [Tax Warning on MLP ETF]

MLP ETFs include:

  • First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP)
  • Global X MLP ETF (NYSEArca: MLPA)
  • Yorkville High Income MLP ETF (NYSEArca: YMLP)

MLP ETNs include:

  • Credit Suisse Master Limited Partnerships ETN (NYSEArca: MLPN)
  • Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY)
  • UBS ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI)
  • UBS ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure ETN (NYSEArca: MLPL)
  • UBS ETRACS Alerian Natural Gas MLP ETN (NYSEArca: MLPG)
  • UBS E-TRACS Alerian MLP Index ETN (NYSEArca: AMU)
  • UBS ETRACS Wells Fargo MLP Index ETN (NYSEArca: MLPW)
  • UBS ETRACS 1xMonthly Short Alerian MLP Infrastructure TR* ETN (NYSEArca: MLPS)

For more information 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.