Master limited partnership exchange traded funds are garnering more attention as a way to access the booming energy industry with attractive yield opportunities. Nevertheless, potential investors should be aware of how the funds work.
MLPs offer high yields because of their partnership structure, which does not require tax on the entity level, leaving the companies more money to distribute to shareholders, writes Dan Caplinger for The Motley Fool. Additionally, MLP distributions often come with income that is not fully taxable.
When investing in individual MLPs, investors have to fill out a Schedule K-1 that most never hear about, instead of the simple 1099 forms.
On the other hand, MLP ETFs offer the convenience of 1099s rather than K-1s. However, MLP funds are structured as regular C-Corporations. Consequently, the C-corporation ETFs pay corporate taxes on their profits to meet their tax liability, which has also dragged on MLP ETFs' performance.
- ALPS Alerian MLP ETF (AMLP)
- First Trust North American Energy Infrastructure Fund (EMLP)
- Yorkville High Income MLP ETF (YMLP)
Fund products offer diversification qualities, but if you don't like the indirect corporate tax exposure, investors can look at exchange traded note alternatives, like the JPMorgan Alerian MLP ETN (AMJ).
However, ETNs are debt instruments and subject to an issuer's credit risk. Moreover, last year AMJ reached the limit on the number of shares outstanding set by issuer JP Morgan (JPM). The ETN is trading at a slight premium to net asset value.
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.