MLPs are publicly traded partnerships that typically own energy infrastructure assets like pipelines, storage terminals, and processing facilities. Structurally, they’re different from regular corporations. Instead of paying corporate income tax, they pass through most of their income directly to investors.
Some of the most well-known names in the space include Energy Transfer (NYSE:) and Enterprise Products Partners (NYSE:). What you’ll notice about these companies is that they often offer unusually high yields and they’re not structured as regular C corporations. Instead, they send investors a Schedule K-1.
A K-1 reports your share of the partnership’s income, deductions, and credits. It’s a massive hassle. K-1s are complex, often delayed, and come with unique tax reporting challenges. Unless you’re extremely motivated, it’s best to avoid holding MLPs directly in taxable accounts.
The easiest way to get MLP exposure without the K-1 headache is through an ETF that packages it all for you and issues a simple 1099-DIV instead. But not all MLP ETFs are created equal.
Some are inefficient, some are pricey, and some are surprisingly solid. Here are three of the most notable MLP ETFs by AUM and my take on each.
MLP ETFs: The Good
My “good” pick in the MLP ETF space is the Global X MLP ETF (NYSE:) because of how straightforward and relatively inexpensive it is. There’s no gimmick here. It does exactly what it says on the label.
MLPA tracks the Solactive MLP Infrastructure Index, which holds 20 of the largest midstream MLPs. It’s a simple, market-cap-weighted portfolio, giving you exposure to all the big players like ET and EPD right at the top.
The fund charges a 0.45% expense ratio, which works out to $45 annually on a $10,000 investment. That’s roughly 15% below the category average, making it a competitive option in a notoriously expensive niche.
Income potential is strong too. MLPA sports a 30-day SEC yield of 6.27%, paid quarterly. The 30-day median bid-ask spread sits at 0.10%, which isn’t the tightest but is perfectly reasonable given the underlying asset class.
I’ve had my gripes with some Global X thematic products, but MLPA is one of their cleaner, more efficient offerings. It gets the job done.
MLP ETFs: The Bad
I know I’m going to catch some flak for this one, but Alerian MLP ETF (NYSE:) — the biggest name in this niche—is, in my view, quite overrated.
Yes, it’s massive, with $10.6 billion in assets under management. Yes, it has one of the longest track records, dating back to August 2010. But none of that changes the fact that AMLP is a passive index-tracking ETF with an unusually high 0.85% expense ratio.
What you’re paying for is the “flagship” Alerian MLP Infrastructure Index, which holds just 13 names. And every single one of those names is already in MLPA. So, right off the bat you’re getting less diversification for higher fees.
To be fair, AMLP does offer a few benefits over MLPA. It’s slightly more liquid, with a tighter 30-day median bid-ask spread of 0.04%. But the fee drag from that 0.85% expense ratio is hard to ignore.
In fact, if you check AMLP’s own website, you’ll see that tracking error has been an issue. The ETF has consistently underperformed its benchmark over time, and that gap is largely explained by the high cost of ownership. Big doesn’t always mean better.
MLP ETFs: The Ugly
An ugly ETF is one I wouldn’t touch, and for me that’s First Trust North American Energy Infrastructure Fund (NYSE:).
This fund is actively managed. There’s no index to track. It’s a pure stock-picking strategy at its best or worst, but that comes at a painfully high cost. The 0.95% expense ratio is steeper than what some managed futures ETFs charge today.
The holdings are unremarkable. You’ll find Energy Transfer and Enterprise Products Partners up top, but the rest of the portfolio dilutes pure MLP exposure with C-corp names like Kinder Morgan (NYSE:) and even regulated utilities like Southern Company (NYSE:) and American Electric Power (NASDAQ:).
Sure, the theme is “energy infrastructure,” but you could easily replicate the same exposure with a low-cost MLP ETF, a low-cost utility ETF, and a few midstream C-corp picks at a fraction of the price.
Even First Trust’s own benchmark, a blend of 50% PHLX Utility Sector Index and 50% Alerian MLP Total Return Index, shows how far off the mark EMLP has been.
Over the past 10 years, EMLP returned 8.1% total versus 9.38% for the benchmark. Over five years, the gap was 17.6% versus 19.81% annually. Only over the past one- and three-year periods has EMLP shown any relative strength, but the longer the horizon, the more that 0.95% fee weighs it down.