Equities Outpacing MLP Fund Performance

December 06, 2013

These income-generating ETFs are popular, but their returns are a far cry from the broad stock market.

Master limited partnerships, and the ETFs that own them, are very popular with income-oriented investors for their attractive distribution growth and juicy yields. Still, it’s noteworthy that for all the hype surrounding MLP ETFs, they're underperforming the broad stock market by a sizable margin this year.

If you look at the biggest MLP ETF on the market today, the $7.24 billion Alerian MLP ETF (AMLP), the fund has seen total returns of 16 percent year-to-date, or about half the performance of the SPDR S&P 500 ETF (SPY | A-98). The younger Yorkville High Income MLP ETF (YMLP), which came to market in March 2012, has returned only about 9 percent in the same period.

Chart courtesy of StockCharts.com

The reason for such variations when it comes to performance from products tapping into the same segment is linked to the structural differences—and the varying tax implications between them—of their costs and the exposure they deliver. To put it mildly, as IndexUniverse’s ETF analysts have said before, the MLP segment is one of the most complex in the ETF industry.

For instance, while the distributions MLP ETFs pay out don’t show up on a fund’s price performance, they do on a fund’s total return. They also show up in the fund’s total return NAV. What’s more, MLP ETFs that hold solely MLPs must pay corporate and state income taxes, which is ultimately a drag on returns, and will be reflected in the calculation of NAV.

For AMLP, for instance, that tax reality bumps its overall costs to 4.85 percent annually—after accounting for future tax expensesor $485 per $10,000 invested. Its underlying management fee is 0.85 percent, or $85 a year per $10,000 invested. Of course, the tax consequences in the ETF are called “deferred” for a reason—you might not have to pay much of the tax bill for a while, and that’s an important consideration for some investors who may want that deferral.


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