Exchange traded funds and notes tracking master limited partnerships have fallen sharply in November amid fears over the U.S. fiscal cliff. However, MLP ETFs could still be attractive to income-oriented investors searching for yield.
Also, most of the income produced by MLPs is not in the form of "qualified" dividends. Therefore, they would not be affected by potential higher tax rates on dividends.
"Two key groups of high-yielding equities, master limited partnerships and real estate investment trusts, were never eligible for the 15% federal tax rate in the first place, so the current treatment of these income streams isn't at risk," says Josh Peters, editor of Morningstar's Dividend Investor newsletter.
President Barack Obama's re-election and the looming fiscal cliff have many predicting that the tax breaks on stock dividends and capital gains won't be renewed at the end of 2012. If the tax cuts expire, the rate on qualified dividends could rise from 15% to as high as 39.6% for top earners.
MLPs are companies involved with the storage and transportation of commodities such as oil or natural gas. They are known for their high dividends and diversification benefits, although the asset class and related ETFs have unique tax wrinkles.
Investment researcher Morningstar was out recently with a warning on one of the category's most popular funds, ALPS Alerian MLP ETF (AMLP).
MLP ETFs and exchange traded notes have added over $200 million in assets since mid-October, reports Murray Coleman for MarketWatch.
"The average investor is probably best served buying MLPs in an IRA (individual retirement account) through an ETN, which typically receives better tax treatment than an ETF since it represents a note tied to the performance of an underlying index and doesn't actually own securities," Austin Poirier, a senior investment advisor at Ballentine Partners, said in the article.
MLP ETFs include:
- ALPS Alerian MLP ETF
- First Trust North American Energy Infrastructure Fund (EMLP)
- Global X MLP ETF (MLPA)
- Yorkville High Income MLP ETF (YMLP)
MLP ETNs include:
- JP Morgan Alerian MLP Index ETN (AMJ)
- Credit Suisse Master Limited Partnerships ETN (MLPN)
- Morgan Stanley Cushing MLP High Income Index ETN (MLPY)
- UBS ETRACS Alerian MLP Infrastructure ETN (MLPI)
- UBS ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure ETN (MLPL)
- UBS ETRACS Alerian Natural Gas MLP ETN (MLPG)
- UBS E-TRACS Alerian MLP Index ETN (AMU)
- UBS ETRACS Wells Fargo MLP Index ETN (MLPW)
- UBS ETRACS 1xMonthly Short Alerian MLP Infrastructure TR ETN (MLPS)
Max Chen contributed to this article.