Beware MLP ETFs

I haven’t gotten around to discussing owning individual stocks vs mutual funds vs ETFs but I saw an article today that I wanted to discuss briefly with regard to MLPs.

There have been several ETFs launched recently to track the performance of the MLP sector or the Alerian MLP Index (AMZ). One ETF in particular has several issues that makes it one to avoid. See the article by Ron Rowland here. In it he says;

However, shareholders appear to be oblivious to the fact that AMLP employs a 62.5% daily leverage factor, thereby giving shareholders a 37.5% daily haircut.

And this is on top of the 0.85% yearly management fee you need to pay. The other MLP ETFs don’t seem to have similar issues but have others such as the credit risk in an ETN or the tax treatment of distributions.

My advice, stay away from MLP ETFs. Buy the individual MLPs directly. You’ll pay a lot less fees and you get the tax deferral benefits. The downside is you need to deal with the special K-1 tax forms. This seems like a big obstacle for a lot of investors which is something I’ve never quite understood. If you do your own taxes (which I do), yes, the tax forms are a royal pain. But for me the benefits of MLP ownership far outweigh this once a year inconvenience. If you pay someone to do your taxes, then pay them a little more to deal with the K-1s. Again, I think the benefits far outweigh the downsides.

Last thing about MLPs is that they are really not suitable for investing in IRA accounts due to tax issues. The series of articles I referenced in my MLP post discuss this in more detail but in general don’t invest in MLPs in your IRA. Some MLPs are coming out with share classes that avoid these tax issues, the most notable being Kinder Morgan, which has a share class called KMR that avoids the issues with tax deferred accounts and there are no K-1s to deal with even in taxable accounts. To boot, for some strange reason KMR trades at a ~15% discount to KMP when they represent exactly the same security. So, if KMP looks attractive to you, look at KMR first.

Disclosure: long KMP

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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