Master Limited Partnerships (MLPs)

Posted on 11/04/2010

Since trickling into the market 18 months ago, the various MLP funds launched thus far have accumulated more than $2 billion.  But what exactly are MLPs?  Master Limited Partnerships (MLPs) are limited partnerships that are publicly traded on a U.S. securities exchange. Because of their structure as a partnership they must distribute the majority of their profits to shareholders, and also due to this structure are shielded from certain tax liabilities that most corporations are not. Most MLPs operate in the energy or "infrastructure" space, owning and operating natural gas and oil pipelines, or other such infrastructure interests.

One of the attractions to MLPs historically, aside from their distribution of earnings, is that their revenue is generally based upon fee-based revenues as opposed to the more volatile businesses of looking for Gas and Oil reserves, or drilling for them. MLPs are often seen as not owning the cars on the street, nor making the cars on the street, but instead owning the street and operating the toll booth for which vehicles must pass. In this sense revenues are a bit less volatile than other areas of the Energy segment, which may be greatly tied to changes in commodity prices, or the ability to find new supply.

Of course, a few years ago the desire to invest in MLPs was generally met only with the ability to buy individual issues. In April 2009 the first MLP ETN was launched, and there are now a handful of MLP Notes and one MLP ETF, which have been received with open arms by investors thus far. In this case the structure of an ETN or ETF adds a particularly attractive and uncommon element for investors by actually removing the need for a K-1.

Investors are generally forced to deal with the K-1 form when investing in an MLP, as a function of its structure being a limited partnership. However, neither MLP ETFs or ETNs generate a K-1 as the fund itself is not a partnership and does not hold futures contracts, and of course provides the diversification of multiple income streams through various MLPs held in the fund. Income is taxable as ordinary income, even if held in an IRA above a certain level, which is something to keep in mind. Overall, the funds offer an interestingly high yield opportunity and are worth considering today.

Below is a list of relevant ETFs and ETNs for MLPs along with their year-to-date performances.  As shown below, these funds look very attractive as far as their returns are concerned.  In fact, on a year-to-date basis, all of the funds have outperformed major U.S. indices.  For instance, the S&P 500 is up only 7.43%.  Similarly, the Dow Jones has posted a gain of 7.55% while the NASDAQ gives a return of 11.95%.


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Symbol Performance
EEH 190.719%
JO 63.226%
CAFE 59.496%
SMIN 49.366%
SCIF 44.101%
FBT 43.481%
SCIN 42.833%
INCO 42.620%
PBE 35.169%
XBI 33.157%
ZROZ 31.422%
Sector Symbol Performance
Healthcare FBT 43.481%
Financial REZ 24.474%
Utilities RYU 21.046%
Energy MLPX 18.628%
Industrial IYT 17.134%
Technology PSI 16.631%
Consumer Noncyclical FXG 12.703%
Basic Materials JJU 8.315%
Telecommunications VOX 5.522%
Consumer Cyclical RTH 5.177%

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