But MLP ETFs come with some thorny tax issues. MLP ETFs that hold more than 25% of their portfolio in MLPs are structured as C-Corporations in order to track an underlying MLP-related index. Due to the C-Corporation 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. [MLP ETF Tax Issues]
Like a regular equity-based ETF, an MLP ETN, such as the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), tracks an index. Fortunately, MLP ETNs are taxed the same way as their ETF counterparts.
“In general, the ETN is used by investors more interested in a higher total return; investors who are more interested in the income or who don’t want to take on credit risk use the ETF,” writes Balchunas.
JPMorgan Alerian MLP Index ETN
ETF Trends editorial team contributed to this article.