As a partnership, MLPs act as a pass-through entity where the company’s income or losses pass through to individual owners of the partnership. In contrast, in the ETF corporation structure, investors will experience a double taxation where the corporation pay corporate income tax and then again when dividends are paid out.
On the other hand, MLP exchange traded notes do not come with 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. [Exchange Traded Notes (ETNs)]
For qualified accounts, like 401(k)s and IRAs, investors should use MLP ETFs, whereas individuals may incur taxes on unrelated business taxable income, or UBTI, which is what MLP income is considered, in these accounts down the road. Nevertheless, we are not accountants, and potential investors should still consult their tax experts.
MLP ETFs include:
- ALPS Alerian MLP ETF (NYSEArca: AMLP)
- 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:
- JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ)
- 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 past stories in this series, visit our “What is an ETF?” category.
Max Chen contributed to this article.