Master limited partnership exchange traded funds have provided investors with a steady source of income and exposure to the greater activity in the U.S. oil industry, but hybrid MLP and energy infrastructure ETFs could generate greater returns.
Specifically, lesser known entities that are closely related to MLPs – MLP affiliates or their General Partners – have historically generated better total returns than their counterparts, according to a Global X report.
The General Partners have managerial and administrative control over MLPs. GPs also have an initial ownership stake in the MLP of around 2%.
Consequently, GPs are compensated for their management through incentive distribution rights, similar to hedge funds. If they are able to raise an MLP’s cash flow, GPs receive an increasing distribution growth rate percentage through the compensation structure established through IDRs. So, it is in the best interest of GPs to increase MLP’s cash flow.
“GPs had higher annualized distribution growth rates than their corresponding LP units,” according to the report. “A security with a high distribution growth rate can be attractive to investors as rising distributions often leads to stock price appreciation. Despite the fact that GPs often have lower yields than their related LPs, increasing distributions and the resulting price appreciation can result in higher total returns (yield + price appreciation) for investors.”
Hybrid MLP ETFs, or non-C-corporation MLP ETFs, have reduced direct MLP holdings to under 25% to meet regulatory rules and hold other energy infrastructure stock through subsidiaries as a way to avoid double taxation. [How MLP ETF Structures Affect Yields and Returns]