Definitive Guide To MLP ETFs And ETNs

April 04, 2013

Looking purely at the top-line numbers, however, does at least highlight the major differences between the ETF/corporation approach, and the ETN approach.

As you can see, AMLP is currently the only ETF/corporation that has been able to track its index tightly, but it suffers from a low beta to its targeted index. The lower beta figure is easy to understand when you assume that the fund assumes a maximum corporate tax rate of 35% on its unrealized gains; has to pay actual taxes on its realized income and gains; and also pays state taxes. The fund is essentially underleveraged to its index.

On the other hand, AMJ and the UBS ETRACS Alerian MLP Infrastructure Index ETN (MLPI) achieve a beta close to 1 because taxes are not taken out at the fund level.

However, despite the many caveats of the ETF/corporation structure, so far the majority of dividends paid by AMLP have been eligible to be treated as return-of-capital distributions, much like the underlying MLPs themselves (85% in 2011, 99.7% in 2012). While the ETF investors don’t have the basis changes that a direct MLP investor would have from depreciation or income, they do benefit from the tax-deferral effects of these return-of-capital distributions. However, this benefit may come at a price, including (1) the future cost of higher aggregate double tax on the amount of such distributions, (2) the tax cost of subjecting any current distributions that do not qualify as return of capital to a higher double tax, and (3) the tax cost of subjecting any net economic appreciation, being accounted for no later than the investor’s disposition of his or her ETF units, to a potentially higher aggregate double tax.


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