More Gain, Less Pain: An MLP ETF for the Best of Both Worlds

By Morningstar’s definition, energy can be a sensitive sector, subject to the highest of highs and the lowest of lows in the market. ETF investors can get the best of upside potential and downside protection with the Global X MLP ETF (MLPA).

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. 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.

Overall, MLPA gives investors:

  • High Income Potential: MLPs typically pay high yields to investors because they do not pay corporate income taxes.
  • Midstream Exposure: MLPA invests in midstream pipelines and storage facilities that have less sensitivity to energy prices.
  • A Low Expense Ratio: MLPA’s expense ratio is nearly 30% lower than the competitor average.

MLPs: A Flexible Investment Vehicle

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. On the back of a recent energy rally, the fund is up over 20% within the last three months:

MLPA Chart

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