There’s no question that energy is rallying, with the S&P 500 Energy Sector Index up over 40% within the last three months. ETF investors looking to get an alternative play on energy can do so via master limited partnerships with a fund like the Global X MLP ETF (MLPA), which is up over 13% to start 2021.
MLPA seeks to replicate a benchmark that offers exposure the overall performance of the United States master limited partnerships (MLP) asset class. MLPs have become very popular in recent years for primarily two reasons: (1) required quarterly distributions provide a steady stream of current income, and (2) because they are partnerships, MLPs avoid corporate income taxes at both the federal and state level as the the tax liability is passed through to the individual partners.
By generating at least 90% of income from natural resource-based activities such as transportation and storage, an entity can qualify as an MLP and not be taxed as a corporation. So the IRS treats shareholders of an MLP as partners, making the MLP itself a pass-through entity, which means that taxes are avoided at the corporate level, and investors avoid the double taxation of income.
ETFs structured as a partnership are unincorporated business entities so they are not subject to the double taxation of a corporation. If the partnership does not elect to be taxed as a corporation, then it also benefits from pass-through taxation so any realized gains and losses flow directly to investors in the fund.
MLPA: A Flexible Income Option
Partnerships are flexible in terms of the types of investments they can make. Unlike grantor trusts, partnerships can invest in other types of commodities like oil or natural gas due to their flexibility.
ETFs structured as a partnership fall under the regulatory measures of the U.S. Commodity Futures Trading Commission. As such, these ETFs are subject to reporting and other financial disclosures.
MLPA, with its 0.46% expense ratio, offers cost-conscious investors an appealing way to beef up income. The fund is up over 30% within the last three months:
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