High-Yield MLP ETFs Come with Risks, Tax Issues
December 3rd, 2012 at 11:35am by John Spence
Some exchange traded funds tracking master limited partnerships are paying nearly double-digit yields but ETF investors need to be aware of the sector’s risks and tax pitfalls before rushing in.
MLPs are companies involved in the transportation of energy, including oil and natural gas. Many investors have gravitated to ETFs tracking the asset class for diversification and yield in a low-rate market.
The two largest products for MLPs are ALPS Alerian MLP ETF (NYSEArca: AMLP) and JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ). [What is an ETF? — Part 30: Master Limited Partnerships]
The sector’s popularity is rising but analysts and financial advisors are warning investors to tread carefully, reports Joe Light at The Wall Street Journal.
“The Alerian MLP index, which tracks the 50 most prominent MLPs, has risen 158% over the past decade, bringing its total market value to $282 billion. But the market’s success is raising pitfalls for investors,” he writes.
MLPs are sensitive to interest rates, and there could be a rush for the exits in the relatively illiquid asset class if rates rise. Also, banks and private-equity shops are rushing out MLPs to meet rising demand.
“When you have a hot asset class like this, the quality of new issues gets lower and lower the more investors thirst for it,” said Peter Langas, head of investment strategies at Bessemer Trust, in the WSJ story.
Finally, MLPs and ETFs tracking the sector have complicated tax issues that investors need to understand before jumping in. [Master Limited Partnership ETF: Morningstar Warns on Taxes]
JPMorgan Alerian MLP Index ETN
Full disclosure: Tom Lydon’s clients own AMLP.
The opinions and forecasts expressed herein are solely those of John Spence, 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.