The MLP investments are evolving fast, at least in the North American Energy sector where the master limited partnerships and their equity are actually a combined asset of small companies involved in production and transportation of energy forms. The expansion in this sector depends on effective energy transmission logistics and this is where these entities will contribute the most and ditto is the reason for growing affinity for MLP ETFs.
The master limited partnership is publicly traded and is formed by a union of two partners. The limited partners invest their capital in the MLP and in lieu of that receive regular pay outs / income distribution.
The second group consists of general partners responsible for management of the MLP venture and receive reimbursements based on performance of the project. Most of these MLPs are involved in some or the other sector related to energy such as carriage, storage, mining of minerals and natural resources.
The lack of growth in crude oil prices connotes negativity for the commodity sector but has almost no impact on the MLP ETFs or even MLP mutual funds. These businesses are either pipeline operators that carry natural gas, refined products and oil etc. and their incomes are not marred in any which way with a slump (or a jump) in oil and gas prices.
This advantage doubles up for satisfying diversification requirements in a portfolio.
Another plus in this space is that the avoidance of corporate tax leads to a minimum of 90 % (or more) of the revenue going to the partners. Thus yields are much above satisfactory mark.
On the downside the MLP arrangement is faced with complex tax matters in the practice of a need of K-1 form. Sometimes the investors are expected to abide by tax obligations that require filing taxes in each of the state where a certain pipeline extends its reach. Therefore possessing energy MLP in equity traded product construction (ETP formula) the tax intricacies and the associated k-1 form can be evaded as pay-out is treated as being ordinary.
MLP investing especially in ETF or ETN form may ensure steady revenues in a scenario that does not provide decent interest rates to income conscious investors. This asset class has performed progressively well so far in this current fiscal year. There is great potential in furthering the advances in the energy segment and MLPs are projected to appreciate along-side these developments carried on to meet the increasing power demand and production.The broader market investments in the sector also call for a lesser management fees which are around 45% on an annual basis, depending on the ETF issuer. Now this is not only significantly better than direct equity costs, it is also cheaper than MLP mutual fund. Although both, ETFs and Mutual funds provide the desired diversification in as much as +30 MLPs and their equity but being market traded, the liquidity is much higher in the former product.
Thus to sum it up, investors when indulging in Energy MLP exposure via the ETF route definitely save on operational costs and simultaneously can treat K1s on a reporting basis only, are eligible for quarterly income pay outs and all the profit procured is eligible for 401K investments.
Energy and related infrastructure is an industry that has a proven long term demand, and the current stock valuations are reasonably attractive for the active equity in the sector. The industry also has little or nil correlation with S & P indices as its historical data, which may appear as security to some who want regular incomes in adverse market scenarios.
Global X MLP ETF [MLPA] delivers as per the performance of the Solactive MLP Composite Index and the issuers charge management fees of 0.45% on an annual basis. However with deferred income tax expenses the total expenses are close to 3.52% when investing in this master limited partnership (NYSE:MLP) ETF. MLPA gives an almost equal exposure to thirty energy master limited partnerships and the underlying index has delivered about 19% in the first quarter of 2013.