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The Benefits And Risks Of MLP ETFs

http://www.infracapmlp.com/about/fund-profile.html - Master limited partnerships (or MLPs) have long been favored by income investors for their high yields and non-correlated returns.

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The Benefits And Risks Of MLP ETFs

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  1. The Benefits And Risks Of MLP ETFs

  2. Master limited partnerships (or MLPs) have long been favored by income investors for their high yields and non-correlated returns. Most MLPs operate a toll-road style infrastructure of pipelines, storage facilities, and transport for the oil and gas industry. Because of their specific legal structure, they are able to return a high portion of their earnings to shareholders in the form of dividends.

  3. While many investors prefer to own publicly traded MLPs directly, you can also access a basket of these securities through an exchange-traded fund (ETF). The benefit to ETF ownership is that you skirt the issue of being labeled a limited partner for tax purposes to avoid receiving a K-1 at year end. In addition, you are also able to benefit from the effects of diversification, transparency, and liquidity in the ETF format.

  4. The largest ETF in this space is the Alerian MLP ETF (AMLP), which is based on the Alerian MLP Infrastructure Index. AMLP has over $8.7 billion dedicated to the 20 largest and most liquid master limited partnerships. Top holdings include: Enterprise Products Partners (EPD), MarkWest Energy Partners (MWE), and Plains All American Pipeline (PAA).

  5. Based on the last quarterly distribution and the current market price, AMLP sports a yield of 7.53%. In addition, this ETF charges a management fee of 0.85% that is combined with a 4.58% income tax deferral for a combined net expense ratio of 5.43%. The income tax deferral component is how investors in this fund are able to avoid the K-1 and instead receive 1099 tax reporting. • Now at one point last year, the yield on AMLP had fallen below 6% as higher commodity prices supported equity valuations in this sector. However, the deflationary trend of oil and natural gas has weighed on MLPs considerably this year.

  6. This ETF is now below both its short and long-term moving averages and has continued to degrade since peaking in early May. Long-term averages are good guideposts for those looking to more actively manage their portfolios. AMLP appears intent on re-testing its lows of the year, which will be a significant technical level to watch. • Conservative investors in the MLP space may be attracted to the First Trust North American Energy Infrastructure Fund (EMLP). This actively managed ETF takes a unique approach by combining traditional MLP exposure with conventional utility companies as well. (More actively managed ETFs with reasonable fees can be found here.) This methodology broadens the sector exposure and provides a cushioning effect with the defensive utility allocation. EMLP has accumulated over $1.1 billion in total assets spread among 69 holdings.

  7. The drawback to the combination of asset classes is reduced overall yield on the portfolio. EMLP currently yields 3% and charges a slightly higher expense ratio of 0.95%. However, that reduced dividend stream is the tradeoff that you assume for lower overall price volatility. • Income investors with a more aggressive thirst for yield may be interested in the Yorkville High Income MLP ETF (YMLP). This ETF follows the Solactive High Income MLP Index, which selects some of the highest yielding MLPs in the industry to create a markedly different portfolio than the Alerian benchmark. YMLP has a current 30-day SEC yield of 9.88% and has recently hit new 52-week lows as this industry grapples with global commodity volatility.

  8. Another popular method of investing in a diversified basket of MLPs is through an exchange-traded note (ETN). Rather than owning a basket of securities, ETNs function as debt instruments that promise to track an underlying index with intra-day liquidity similar to an ETF. The JP Morgan Alerian MLP ETN (AMJ) is an ETN that tracks the same underlying index as AMLP and charges a similar expense ratio of 0.85 percent. This fund has just over $5 billion in total assets and provides sophisticated investors with another vehicle to structure their exposure.

  9. The Bottom Line • While MLP ETFs and ETNs can offer higher than average yields, the recent price trend is wary of a cautious stance. Investors considering these funds must do their due diligence with respect to tax ramifications, fees, and the underlying asset allocation of the fund. Nevertheless, these alternative income tools can provide non-correlated returns and offer income investors a unique dynamic under favorable conditions.

  10. Contact us • Website :http://www.infracapmlp.com/about/fund-profile.html • Address: • InfraCap MLP ETFETFis Series Trust I,6 E. 39th Street,10th FloorNew York, NY 10016 • 212-593-43831-888-383-4184 (toll free) • info@etfis.com

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