Midstream energy companies are enjoying the strength of the energy sector as a whole, and exchange traded fund (ETF) investors can piggyback off that success in order to get an inflation hedge in today’s market.
“Most midstream companies have built in contractual escalators tied to inflation,” said Wells Fargo analysts.
This gives the Global X MLP ETF (MLPA) worthy consideration with its quarterly distribution. As far as the fund description is concerned, MLPA seeks to replicate a benchmark that offers exposure to 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 tax liability is passed through to the individual partners.
Companies qualifying for the fund’s selection pool as stated in the index methodology summary are those:
- Listing on a regulated stock exchange in the United States
- Structured as MLPs, taxed as partnerships, or MLPs that are taxed as corporations
- With business focus on owning and operating assets used in energy logistics
- With a free float market capitalization of at least $2 billion
- With an average daily trading volume in the last three months of at least $2.5 million
- That have maintained or grown their distributions quarter-over-quarter for at least one of the trailing two quarters.
General Partners (“GPs”) are not eligible for inclusion.
Tax Advantages of MLPA
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, allowing investors to avoid double taxation.
ETFs structured as partnerships 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.
Partnerships are flexible in terms of the types of investments they can make, allowing for diversification. Unlike grantor trusts, partnerships can invest in other types of commodities like oil or natural gas due to their flexibility.
ETFs structured as partnerships 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.
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