Global X’s New MLP ETF Attempts to Avoid Tax Bite
August 6th 2013 at 4:20pm by Tom Lydon
Global X is launching a master limited partnership exchange traded fund structured as a Regulated Investment Company, avoiding the effects of double taxation associated with C-corporation structure.
According to a note, the Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) will begin trading Wednesday, August 7. The fund will try to reflect the performance of the Solactive MLP & Energy Infrastructure Index, which tracks midstream energy infrastructure MLPs and corporations that own and operate pipelines, storage facilities and other assets used in transporting, storing, gather and processing natural gas, natural gas liquids, crude oil or other refined products. MLPX has a 0.45% expense ratio.
Top holdings include Enbridge Inc. 9.0%, Transcanada Corp 9.0%, Kinder Morgan Inc 9.0%, Williams COS 8.0% and Spectra Energy 7.0%. The fund weights 76.6% to natural gas pipelines and 23.4% to petroleum pipelines.
The ETF doesn’t hold more than 25% of its holdings in MLPs due to regulatory restrictions. However, since MLPX is structured as a Regulated Investment Company or Unite Investment Trust, the fund is eligible to pass taxes on capital gains, dividends or interest earned directly to clients or individual investors.
This process helps protect investors from double taxation where the company and individual investors would be taxed.
On the other hand, the Alerian MLP ETF (NYSEArca: AMLP) is structured as a C-corporation and incurs a deferred tax liability out of the returns every day. Consequently, some argue that AMLP has an expense ratio closer to 5% – 0.85% base expense ratio plus 4% fees listed as “other expenses.” [A Closer Look at Master Limited Partnership ETFs and ETNs]
The actively managed First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) was the first ETF to limit direct MLP exposure to less than 25% and holds exposure to MLP affiliates and other energy infrastructure stocks. EMLP has a 0.95% expense ratio and a 2.69% 30-day SEC yield.
MLPs build, acquire and operate transportation assets. While investors link MLPs with energy, specifically natural gas and crude oil, they are more involved with transporting the commodities. Consequently, the performance of MLPs is less dependent on commodity prices than on how much of the commodity is pushed through. [What is an ETF? — Part 30: Master Limited Partnerships]
According to Global X, MLPs show a low-correlation to traditional assets, which helps diversify a portfolio. The assets pay out the majority of their operation cash flow in the form of quarterly dividends. Additionally, the MLP contracts are long-term and have built-in inflation protection measures.
MLP fund investors will not be required to fill out K-1 forms. Instead, investors will receive a single 1099 form.
For more information on new fund products, visit our new ETFs 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.