Posted on 03/13/2012
MLPs, as a group, are an area of the financial market that are generally considered to be a solid source of income with a historically low correlation to equities, bonds, and just about everything in between. In addition to the high yielding characteristics of this space, this has generally been a low volatility way to participate in rising demand for aspects of the Natural Resource theme, as MLPs are often referred to as the toll booth operators of the Energy Infrastructure. It is for these reasons that MLPs are often an attractive investment option for advisors, but historically they have been just as difficult in terms of the actual investment vehicles available. For starters, the MLP world has not been a particularly accessible area of the market for many investors. Not only do investments in MLPs generally mean dealing with a pile of K-1s each April, as a function of their structure as a limited partnership, but the K-1s included the dreaded "UBTI" which makes the investments like oil to the proverbial water of qualified accounts. Long story, short, MLPs for many have been a very appealing concept with an equally daunting path toward implementation.
In this case the structure of an ETN or ETF adds a particularly attractive and uncommon element for investors by actually removing the K-1 part of the equation. Neither MLP ETFs or ETNs generate a K-1 as the fund itself is not a partnership and does not hold futures contracts, but yet provides the diversification of multiple income streams through the various MLPs held within the fund. Income from the exchange traded product is taxable as ordinary income for many of the products, but not in the case of the Alerian MLP ETF (AMLP) as we understand it. AMLP is effectively incorporated on its own, and in this manner handles the income distribution from the individual MLPs and the tax treatment that comes with it. The end result for the investor in AMLP is a "qualified" dividend stream and a product that can be used to access the MLP asset class within a broad array of accounts (including most IRAs). There are other MLP products out there, and for some situations they may make more sense, but AMLP is certainly one that has an appealing structure for many advisors looking to use this space.
ALPS introduced the Alerian MLP ETF (AMLP) last year, but there are several other MLP ETFs and ETNs available for purchase. You can use the www.AllETF.com and search string of "MLP" for more information on similar product, but for more information specifically on the Alerian MLP ETF, click here