Taxes
However, in an analyst report on MLPA, Morningstar’s Bailin points out the ETF cuts the fee on MLP exposure but retains tax complications. MLPA is structured as a C-corp and is taxed at the entity level. As a result, investors in this fund are taxed twice, he said.
As always, investors are best served by consulting a tax advisor.
“The advantage of investing in an ETF made up of MLPs is that investors will receive one 1099 form. Those who invest in individual MLPs receive cumbersome K-1 forms, as MLPs are classified as partnerships by the IRS. However, unlike most investment companies, MLPA is structured as a C-corporation and is thus required to pay applicable, entity-level state and federal corporate income taxes. This facet of MLPA’s structure warrants strong investor caution,” Bailin wrote. “The fund will generally be liable to pay such taxes annually on the capital appreciation of its holdings and a small (10%-30%) share of the distributions that it receives from the MLPs.”
He added: “The distribution from the holdings of this fund are passed on to investors as dividends from MLPA. Because the fund pays annual corporate taxes, the net asset value is effectively decreased by the value of the tax. The index calculation does not account for tax deductions, so the fund will have tracking error.”
The benefits of MLPs include high current income, growing distributions, tax-advantaged income, and low correlation to broader asset classes, said Darren Schuringa of Yorkville ETF Advisors in a recent Forbes interview.
Alerian MLP Index ETN
