In this episode of ETF Spotlight, I talk with Jeremy Held, director of research at ALPS Advisors. We discuss investing in Master Limited Partnerships (MLPs) and related ETFs.
Oil prices have rebounded in 2019, after a steep sell-off late last year, leading to a surge in MLP ETFs. The most popular MLP ETF--ALPS Alerian MLP ETF (AMLP - Free Report) is up almost 18% this year. Further, it has a very juicy dividend yield of about 8%. But MLP investing can be complex and it is important for investors to understand tax implications.
Most MLPs are in involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products. They have benefitted a lot from oil and gas boom in the US. Jeremy explains why investors find midstream MLPs particularly attractive.
Since MLPs are structured as pass-through entities, they do not pay taxes at the entity level. Individual MLPs issue complicated K-1s but some of the tax complexities can be avoided by owning them in a fund form. Funds that have more than 25% of their assets invested in MLPs are treated as C corporations for tax purposes. Please listen to the podcast to find out what that means for investors.
While MLP ETNs like the JPMorgan Alerian MLP Index ETN (AMJ - Free Report) have some benefits due to their structure, investors do not get any tax deferred distributions. They should also remember that ETNs are unsecured debt instruments and carry credit risk.
AMLP, the largest MLP ETF, holds energy infrastructure MLPs that earn the majority of their cash flow from midstream activities. It is structured as a C-corporation.
The Alerian Energy Infrastructure ETF (ENFR - Free Report) holds energy infrastructure companies in the US and Canada. Jeremy explains the differences between the two.
Most MLPs operate under long term contracts. So they have relatively consistent and predictable cash flows, unlike exploration and production (E&P) companies, whose profits are highly correlated with commodity prices. We discuss how MLPs are correlated with crude prices.
We also discuss the outlook for oil and MLPs. Do valuations look attractive at the current levels?
How are MLPs correlated with major asset classes? Do they add any diversification benefits to the portfolios?
Tune into the podcast to learn more.
Please visit ALPSfunds if you want to learn more about these products. Make sure to be on the lookout for the next edition of ETF Spotlight! If you have any comments or questions, please email firstname.lastname@example.org.