MLP-related ETFs, like the Alerian MP ETF (NYSEArca: AMLP), are structured as C-Corporations. Due to the C-Corp structure, they must pay corporate income tax on distributions before passing them to investors. Consequently, MLP ETFs may incur higher fees that would cut into overall performance, leading to an underperformance compared to the underlying benchmark.

On the other hand, some non-C-corporation MLP ETF have reduced MLP holdings to under 25% to meet regulatory rules and hold other energy infrastructure stock  through subsidiaries as a way to avoid the double taxation. Some examples include the Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX), Alerian Energy Infrastructure ETF (NYSEArca: ENFR) and actively managed First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP). [Capture the Boom in U.S. Oil with MLP ETFs]

Additionally, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) is unsecured debt instrument that replicates the return of the MLP index. The ETN vehicle is not subject to the double-taxation effects associated with a C-Corporation. ETNs, though, are subject to credit risk of the underwriting bank or issuer.

For more information on oil, visit our oil category.

 

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