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  1. Energy Infrastructure Channel
  2. 3 Questions to Ask When Pondering MLP ETFs
Energy Infrastructure Channel
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3 Questions to Ask When Pondering MLP ETFs

Elle CarusoJan 13, 2022
2022-01-13

The Alerian Energy Infrastructure ETF (ENFR ) and the ALPS Alerian MLP ETF (AMLP A-) seem similar on the surface, but the two funds have their own nuances that will benefit different investors.

While both ETFs offer exposure to energy infrastructure and serve as a way to diversify and add income to a portfolio, there are three questions an investor should consider when deciding where to allocate assets.

1. Is Broad Exposure to Energy Infrastructure or Focused Exposure to MLPs Preferred?

ENFR, which holds $70 million in investor assets and carries an expense ratio of 35 basis points, is an RIC-compliant energy infrastructure fund — meaning that it does not have to pay taxes at the fund level because it owns less than 25% MLPs.

ENFR’s top holding as of January 12 is Enbridge Inc (ENB), a multinational pipeline company with a $84 billion market capitalization, closely trailed by an MLP.

AMLP, which holds $5.5 billion in investor assets and carries an expense ratio of 90 basis points, is structured as a C-Corporation and must pay taxes at the fund level because it’s composed of 100% MLPs. 


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2. How Do the Taxes Vary Between Funds?

ENFR may have more upside for tax-advantaged investors because of the potential for tax-deferred income due to the nature of MLP distributions and pass-through structure.

AMLP does not have a pass-through structure, and thus, fund performance is reduced by the amount of taxes accrued as the fund withholds a portion of the returns. These funds are also able to preserve the return of capital benefit for their investors, and since they can own 100% MLPs, the proportion of income that is classified as return of capital is higher. These funds with more than 25% MLPs tend to be favored by investors seeking to maximize after-tax income, according to Alerian

3. What Does the Yield Look Like?  

AMLP generally offers higher after-tax income because fees are taken from the NAV, preserving yield, and because the tax character of distributions mirrors that of the underlying portfolio, according to Alerian.

ENFR generally offers a lower yield due to the limit imposed on MLP ownership.

For more news, information, and strategy, visit the Energy Infrastructure Channel.

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