Master limited partnerships (MLP) investments are notorious for creating onerous tax filing requirements, and that reputation leads a lot of investors to choose MLP funds over shares of individual companies. But for investors who are comfortable picking their own stocks – especially those who hire an accountant at tax time anyway – investing directly in MLPs has several advantages. It lets you avoid significant fees, see exactly where your money is going, and still get access to glorious dividends.
Consider returns of several popular MLP funds compared to the returns of some big MLPs. First, the funds: JPMorgan Alerian MLP Index ETN (AMJ), ALPS Alerian MLP ETF (AMLP), Nuveen Energy MLP Total Return Common (JMF), First Trust Energy Infrastructure (FIF), and UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI). Keep in mind that the gains seen in the charts do not include the fees investors pay, which range from 0.85% to more than 2%.
Now look at the returns for the top five holdings in the Alerian MLP Index , which in itself retuned about 20% in the past year. They include Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP), Plains All American Pipeline (PAA), Energy Transfer Equity (ETE), and Energy Transfer Partners (ETP). The total returns here reflect what last year’s investors could pocket today.
Isn’t it more risky to pick your own? With ordinary equities, investors usually choose funds so great gains in one stock can cover for the losses in another. But as YCharts explained, most MLP funds don’t work like typical index funds. Many MLP funds, including some of the most popular, are exchange traded notes, which are debt securities. These MLP fund investors pay fees to make unsecured loans to the issuer in exchange for a payout based on an index. So while of course buying individual shares carries risks, they’re not always diminished by purchasing MLP funds. Funds can carry different kinds of risk.
It’s true that owning a share of an MLP individually means getting a K-1 at tax time with dozens of data points, and owning MLPs generally has tax advantages when held in certain ways. A conversation with an accountant on the subject is advised before investing in any of them. Then let that professional deal with the additional paperwork at tax time.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.
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