The Yorkville High Income Infrastructure MLP ETF (YMLI) began trading on February 12, 2013. Don’t let the name fool you. Unlike thousands of other exchange traded funds (“ETFs”) and mutual funds that are Regulated Investment Companies under the Investment Company Act of 1940, YMLI has chosen a different path. Instead, it is a C-corporation that Yorkville simply chooses to call an ETF. Apparently, there are no laws or regulations preventing any company from calling itself an ETF.
Individuals owning Master Limited Partnerships (“MLPs”) receive special tax treatment, making MLPs one of the most tax-efficient investments an individual investor can make. C-corporations are not people though, and they do not enjoy the special tax treatment provided by MLPs. In fact, C-corporations are one of the most inefficient tax structures on the planet. Investment income funneled through a corporation is subjected to double taxation. First, the corporate entity is taxed at the current 35% corporate rate, and then individual investors owning the corporation are taxed. YMLI buries the following important disclosure in the small print:
The fund is treated as a regular corporation for federal income tax, which differs from most investment companies. Unlike traditional ETFs, the Fund is subject to U.S. federal income tax as well as state and local income taxes.
The overview, fact sheet (pdf), and prospectus (pdf) provide additional information on this corporation. There is an obvious conflict between its official objective – YMLI seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Solactive High Income Infrastructure MLP Index – and its stated expense ratio of 0.82%. YMLI will be paying 35% in federal income taxes, plus state and local taxes, and assumes its effective tax rate is 37%. However, these expenses are not included in the expense ratio.
Another C-corporation masquerading as an ETF is the Alerian MLP ETF (AMLP). According to data on the AMLP website, AMLP lagged its underlying index by 4.6% in January 2013. For a product designed to track an index minus expenses, that equates to a one-month expense ratio of 4.6% in my book. Calculating the annualized value of January’s expenses is left as an exercise for the student. Since its inception, AMLP’s total return has lagged its index by 23.8%. That is probably a much more accurate measure of the true cost of ownership than what the “total expense ratio” implies.
Disclosure: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.