Distant cousins of Bonds are the MLP investment products that enable a limited stake in high yield energy stocks. As with bonds, Small Cap MLPs too are inversely proportional to Interest Rates and their risk tolerant character is not a hindrance to long term high yields reaching much as +6%.
Catching on to the trend are the Junior Energy MLP ETFs that are finding sufficient support on the street as they empower the buyers in owning a pool of small cap energy MLPs which have lucrative assets but unlocked value as most major indices ignore them due to their size, being attuned to valid indices like the Junior MLP Index, a regulatory environ is also very much in place.
Master Limited Partnerships or MLP'S as they call it are the latest trend among the wise investors treading the Wall Street. In MLP s the investor will not buy the portions / shares of the equity rather units of partnership with the corporation. Stake holders who can be categorized as General partnership and Limited partnership / unit holders share an understanding where the general partner will manage organization to book keeping and the other segment - Limited holders have no participation in the processes and operations. Only the Limited partner units are traded publicly.
The firms that use the MLP arrangement have an inherent risk aversion trait as they grow leisurely displaying maximum stability at the same time. Though unit price rise can be slow, yet the cash flows remain steady and regular over a stretch. These products have another interesting feature that they trade like bonds and fall with rising interest rates and vice versa.
MLP'S have more than one benefits: To begin with high yields are offered by these products. This easily reaches to 7%- 8%. Further the firms operating on MLP model dispense very frequent and predictable cash flows year on year basis making Junior MLP Mutual Funds a minimum risk option for conventional investors.
Tax benefits come for both- the firms that adopt MLP structure (taxes are nil at the company level and therefore the operating cost is lower than other firms) and the unit holders. The partnership owners are taxed only once during the time of cash distributions. The partnership income pool is lesser in most cases than the money distributions made and the difference is calculated as capital gains tax at the time the unit holder sells his share. Also the rates of capital tax are lower than income tax charges. Due to absence of taxes the MLPs are able to carry on with projects that are often overlooked intentionally by bodies that have tax obligations.
The cash deliveries are estimated to grow annually by 6 - 10 %, thereby providing investors with a big total profit / returns.
On the downside one point needs attention. The unit holder is liable to pay his partnership's share of income taxes. This can confuse the filing process. In case the partnership extends to different states then the unit holder has to pay tax in each of the state.
Another discouragement is due to the fact that pension funds have to pay taxes in order to hold MLP units. So these institutional investors avoid such products. In a provision passed by the Congress the group of investors for the MLP'S will be increased by permitting Mutual Funds to buy them.
There are many options for investors interested in Junior Energy MLP ETFs. The biggest ETF in terms of assets is from JP Morgan. New York based Global X Funds have also launched their product in the said asset class in the beginning of the year 2013 which tracks about 25 different MLPS, their size ranges from roughly $ 200 million to 2.5 billion.
Owning the MLPS directly could seem tempting to investors owing to their high yields, diversification and big returns. On the other hand benchmark bound small cap MLP funds are a more convenient route and also entails the evading of the K1 tax form for investors, which adds as a definitive plus for investors.
Junior mlp mutual fund [ETF] delivers as per the performance of the Solactive Global junior MLP index post the annual expenses of 0.75% and follow a quarterly distribution pattern.