How To Get The Right MLP Structure

December 01, 2014

 

Traditional ETF MLPs
Traditional ETFs don't provide pure-play MLP exposure. They are required by the tax code to limit their MLP exposure to just 25% of total assets, diluted coverage that explains the popularity of C-Corps and ETNs. Traditional MLP ETFs such as the First Trust North American Energy Infrastructure Fund (EMLP) round out the rest of their portfolio with related holdings such as pipeline and energy infrastructure firms organized as corporations rather than MLPs.

Traditional MLP ETFs have diluted benefits regarding deferred taxes on income in proportion to their diminished MLP exposure.

Strategies & Liquidity
While ETP structures have great impact on performance, the objective of each fund matters too. Competing funds focus on various niches and offer differing emphasis on income. Most track an index, but some are actively managed. With only about 100 master limited partnerships in the marketplace, funds take concentrated positions that amplify the impact of their strategies.

A performance chart of funds using a common legal structure—C-Corps in this case—supports this idea (Figure 3). Over the 12 months ending Oct. 31, the differences between the leader, the Yorkville High Income Infrastructure MLP ETF (YMLI) and the laggard, the Yorkville High Income MLP ETF (YMLP), is a whopping 12.5%. Performance diverges among ETNs and traditional ETFs, too.

 

While income is hugely important in the MLP space, Figure 3 also highlights the need to check total return as well as yield.

 

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