Tax Shifts Could Boost This MLP ETF | ETF Trends

The potential for more changes in U.S. tax policy following the 2020 presidential election could impact master limited partnerships (MLPs) and exchange traded funds dedicated to the high-yield asset class, such as the Global X MLP ETF (NYSEArca: MLPA).

MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.

Following the tax reform package passed in 2017, the tax benefits associated with the MLP structure are not as significant as they were in the past.

“But since the Trump tax overhaul pushed corporate rates down to 21% from 35%, the tax advantages of MLPs aren’t as substantial,” reports Avi Salzman for Barron’s. “Several MLPs have changed their structures to become C-corporations, which opens them to up to some people who would otherwise shun MLPs because they are more complicated.”

More MLP Changes

Some analysts believe more MLPs are likely to shift to the C-corp structure.

“If two MLPs, Energy Transfer (ET) and Enterprise Products Partners (EPD), switched to C-corps, perhaps after the election, they would become the second- and eighth-largest dividend-payers in the S&P 500, with dividend yields of 8.2% and 6.1% respectively,” reports Barron’s, citing Bernstein analyst Jean Ann Salisbury. “That would make them stand out to new investors.”

Enterprise Products and Energy Transfer are MLPA’s top two holdings, combining for over 19% of the ETF’s weight.

MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.

“Once a company becomes a C-corp, it can’t go back to being an MLP. If President Donald Trump loses the vote, there’s a chance that a Democrat could push for higher taxes, thereby making MLPs more attractive again,” according to Barron’s.

MLPA has a dividend yield of 8.53%.

For more information on master limited partnerships, visit our MLPs category.