While both ETFs offer exposure to energy infrastructure and serve as a way to diversify and add income to a portfolio, there are three questions an investor should consider when deciding where to allocate assets.
1. Is Broad Exposure to Energy Infrastructure or Focused Exposure to MLPs Preferred?
ENFR, which holds $70 million in investor assets and carries an expense ratio of 35 basis points, is an RIC-compliant energy infrastructure fund — meaning that it does not have to pay taxes at the fund level because it owns less than 25% MLPs.
ENFR’s top holding as of January 12 is Enbridge Inc (ENB), a multinational pipeline company with a $84 billion market capitalization, closely trailed by an MLP.
AMLP, which holds $5.5 billion in investor assets and carries an expense ratio of 90 basis points, is structured as a C-Corporation and must pay taxes at the fund level because it’s composed of 100% MLPs.
2. How Do the Taxes Vary Between Funds?
ENFR may have more upside for tax-advantaged investors because of the potential for tax-deferred income due to the nature of MLP distributions and pass-through structure.
AMLP does not have a pass-through structure, and thus, fund performance is reduced by the amount of taxes accrued as the fund withholds a portion of the returns. These funds are also able to preserve the return of capital benefit for their investors, and since they can own 100% MLPs, the proportion of income that is classified as return of capital is higher. These funds with more than 25% MLPs tend to be favored by investors seeking to maximize after-tax income, according to Alerian.
3. What Does the Yield Look Like?
AMLP generally offers higher after-tax income because fees are taken from the NAV, preserving yield, and because the tax character of distributions mirrors that of the underlying portfolio, according to Alerian.
ENFR generally offers a lower yield due to the limit imposed on MLP ownership.
For more news, information, and strategy, visit the Energy Infrastructure Channel.