Investors seeking alternative income opportunities to traditional fixed-income and equity assets may consider looking into energy infrastructure exchange traded funds.
On the upcoming webcast, High Quality MLP Strategy: Understanding the Benefits of Pipeline ETF, Brian Sulley, Vice President of Tortoise Capital Advisors, and Matthew Weglarz, Portfolio Manager and Vice President at Tortoise Index Solutions, will talk about the negative tax consequences of traditional master limited partnership-related funds and an alternative through a broader energy infrastructure strategy.
MLP ETFs follow an index comprised of MLPs. However, the ETFs are structured as C corporations. Since MLP ETFs are structured as a C corp., these corporations are also required to pay corporate income tax on distributions before the distributions are passed through to investors – MLP ETFs are required to pay corporate taxes or a 35% federal rate on returns.
Related: Master Limited Partnership ETFs Are Back on Trend
MLP fund investors are also taxed on the dividends and capital-gains distributions. Consequently, MLP ETF investors are double-taxed. While it is not an explicit cost, ETF investors would see the results of the corporate tax liabilities through wider tracking errors compared to the performance of the underlying MLPs.
[related_stories]Alternatively, investors who want to stick with ETFs but are wary of the C-corporation structure can consider hybrid MLP ETFs, or non-C-corporation MLP ETFs, which 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 the double-taxation issue. For example, the Tortoise North American Pipeline Fund (NYSEArca: TPYP) is one such hybrid option.
Related: Downtrodden MLP ETFs May Offer Long-Term Opportunity
Specifically, TPYP includes a 20% tilt toward MLPs, 38% MLP affiliates or owners and 42% other pipelines. Sub-sector weights include natural gas pipelines 48%, crude oil pipelines 20%, local gas distribution companies 18%, gather & processing 10% and refined product pipelines 4%.
The pipeline fund also comes with an attractive 4.36% SEC yield.
For more information on master limited partnerships, visit our MLPs category.
Financial advisors who are interested in learning more about the energy infrastructure sector can register for the Tuesday, May 17 webcast here.