Investors may prefer to own Master Limited Partnerships (MLPs) through an ETF for diversified exposure and to avoid receiving a Schedule K-1.
Due to the pass-through structure, investing directly in an MLP will result in receiving a K-1 during tax season. This makes filing more complex, particularly with the addition of potential state income taxes. Holding individual MLPs in tax-advantaged accounts may also result in unrelated taxable income (UBTI).
Therefore, ETFs serve as an important solution in the MLP space. Investing in MLPs through an ETF simplifies the tax process while still capturing the benefits of MLPs. MLP ETFs will not generate UBTI in tax-advantaged accounts, and the ETF issuer receives the K-1s and provides a 1099 to the investor.
ETFs Offering MLP Exposure Without a K-1
There are only a few MLP-focused ETFs available to investors. With $10.5 billion in assets under management, the Alerian MLP ETF (AMLP ) is currently the largest and most liquid MLP ETF, and second-largest energy ETF.
AMLP invests in MLPs and is structured as a C-Corporation with taxation at the fund level. AMLP may fit best in taxable accounts because of its tax-efficient income.
The MLP ETF tracks the Alerian MLP Infrastructure Index (AMZI). The index is a composite of energy infrastructure MLPs that earn most of their cash flow from fee-based midstream activities.
Another option for MLP ETF exposure is the Alerian Energy Infrastructure ETF (ENFR ), which may work best in a tax-advantaged account. ENFR also issues a 1099, qualifies for 401Ks and IRAs, and doesn’t generate UBTI.
ENFR differs from AMLP in that it is RIC-compliant, with just 25% of the fund devoted to MLP exposure. The remaining 75% invests in energy infrastructure corporations in the U.S. and Canada.
See more: ETFs, CEFs & More: MLP Investment Products Evolve
For more news, information, and analysis, visit the Energy Infrastructure Channel.
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and ENFR.
