Energy Infrastructure vs. MLP ETFs | ETF Trends

As with any other investment, it is important to look under the hood and understand the particulars of energy midstream sector-related exchange traded funds so that you know what you are getting into.

For example, while something like the Alerian Energy Infrastructure ETF (ENFR) can provide investors access to the midstream energy segment, ENFR is not structured like master limited partnership-specific ETFs, such as the popular ALPS Alerian MLP ETF (NYSEArca: AMLP).

Specifically, this newer breed of midstream energy ETFs limits MLP holdings to 25% of the total portfolio. According to ENFR’s fund prospectus sheet, the ETF may invest no more than 25% of the value of its total assets in the securities of one or more qualified publicly traded partnerships, which include MLPs.

Additionally, unlike direct investments in MLPs, income and losses from the fund’s investments in MLPs will not directly flow through to the personal tax returns of shareholders. The ETF qualifies as a regulated investment company, or RIC. ENFR will report distributions from its investments, including MLPs, made to shareholders annually on Form 1099.

Under current law, ’40 Act funds seeking to retain pass-through status are prohibited from owning more than 25% of their assets in MLPs, according to Alerian. Funds that abide by this law are called “RIC-compliant.”

Nevertheless, there are funds with over 25% of assets in MLPs, but these funds are no longer pass-through structures and are required to pay taxes at the fund level. Consequently, this means that these funds’ performances are reduced by the amount of taxes accrued.

RIC-compliant MLP products don’t dilute the tax benefits of holding individual MLPs. However, by limiting MLP holdings to 25%, the ETF’s structure includes other energy infrastructure firms with similar characteristics to MLPs. ENFR includes exposure to gathering and processing at 33.2%, pipeline transportation of natural gas at 30.3%, pipeline transportation of petroleum at 27.0%, liquefaction at 7.1,% and storage at 2.3%.

For more news, information, and strategy, visit the Energy Infrastructure Channel.