Master limited partnership, or MLP, exchange traded funds are quickly gaining traction among yield-hungry investors, which is understandable given their high dividend payouts. However, potential investors should act with caution as there are some risks to consider.
MLP ETFs have fallen in May along with the equity market.
"Investors who are looking at higher yielding alternatives such as master limited partnerships and business development corporations must recognize that such investments encompass a great deal more risk than typical individual investors may be willing and able to assume," Bob Johnson, an independent financial consultant, said, reports Robert Powell for MarketWatch.
Most investors have gravitated toward MLPs due to their high yields, with some individual companies issuing yields of up to 10%. Still, individuals need to do their homework on this specialized asset class before investing.
"My advice to individual investors is quite simple," Johnson said in the MarketWatch story. "Reaching for yield in a low-interest-rate environment is fraught with peril. Investors who are unable to accurately analyze and ascertain the risks inherent in such funds should steer clear from them."
"The vehicles often have layers of fees that erode the ultimate return realized by investors," Johnson added. "Many unsophisticated investors are surprised with the more complicated tax issues that investing in these structures typically entails."
MLP exchange traded products have unique tax-related wrinkles that investors need to consider.
Exchange traded products for this asset class include JP Morgan Alerian MLP Index ETN (NYSEARCA:AMJ), Alerian MLP ETF (NYSEARCA:AMLP), Yorkville High Income MLP (NYSEARCA:YMLP) and Global X MLP (NYSEARCA:MLPA).
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.