MLPs are publicly traded partnerships known for their “pass-through” feature that helps investors generate stable, predictable cash flows. Investors, though, are required to pay income taxes in states where the MLP operates and have to report taxes on the K-1 form.
With MLP ETFs, investors won’t have to bother with the K-1 form and will have to fill out the normal form 1099.
Additionally, there are a number of MLP exchange traded notes, which removes the corporate-level taxation problem and may better reflects the full performance of the underlying index. The ETN, though, is an unsecured note issued by an underwriting bank, so investors are subject to credit risk of the issuing bank, The note is taxed as ordinary income.
For example, the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), which also tracks the Alerian MLP Index, has outperformed AMLP’s return by over three percentage points in one year, gaining 12.1%. [MLP ETFs Capture U.S. Energy Expansion]
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.