Another Big Year of MLP ETF Inflows

With U.S. interest rates remaining at historic lows, yield-starved investors have continued allocating massive amounts of capital to exchange traded products offering exposure to master limited partnerships (MLP).

So popular are MLP ETFs and exchange traded notes (ETNs) that the asset class has not endured a month of net outflows in two years, reports Chris Dieterich for Barron’s, citing Ned Davis Research.

While MLP ETFs and ETNs represent just a fraction of the total $437 billion allocated to MLP assets, the $22 billion held by the 23 MLP ETPs trading in the U.S. is double the amount held just three years, ago according to Barron’s.

That asset growth has been on full display this year as the controversial Alerian MP ETF (NYSEArca: AMLP) has added another $1.5 billion in new assets, cementing its status as the largest MLP ETF. The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) is the largest MLP ETN with $6.4 billion in AUM.

AMLP has been widely criticized due to its C-Corporation structure, which forces investors to endure taxes on distributions before receiving dividends. In turn, AMLP’s total expenses are staggeringly high. The ETF sported a gross expense ratio of 8.56% at the end of the third quarter.

Rival issuers have seized the opportunity to offer funds that feature weights of less than 25% to MLPs as a way of skirting C-corp taxation and higher fees.

For example, the Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) doesn’t hold more than 25% of its holdings in MLPs due to regulatory restrictions. However, since MLPX is structured as a Regulated Investment Company or Unite Investment Trust, the fund is eligible to pass taxes on capital gains, dividends or interest earned directly to clients or individual investors. This process helps protect investors from double taxation where the company and individual investors would be taxed. [Rapid Rise for This MLP ETF]

MLPX, one of this year’s top-performing energy ETFs, topped $100 million in asset under management in June and has since grown nearly 81%.

Active management also helps investors dodge the thorny tax issues sometimes associated with MLP ETFs. The actively managed First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP), which has a 12-month distribution rate of 3.1%, is a $939.4 million ETF after less than two and a half years on the market. EMLP has added over $380 million in new assets this year.

The InfraCap MLP ETF (NYSEArca: AMZA), which debuted last month and is also actively managed, has hauled in $3.4 million in assets since coming to market. Due to its status as an actively managed ETF, AMZA can employ hedging via derivatives and even short MLPs during periods of increased market stress. Investors will also be treated to a single form 1099 come tax time, not a pesky, late-arriving K-1. The new ETF charges 1.05% per year. [Inside Look at a New MLP ETF]

Other new MLP ETFs have also made their presence felt. Direxion Zacks MLP High Income Shares (NYSEArca: ZMLP) debuted in January has hauled in $47.6 million since coming to market in January. ZMLP has an annualized distribution rate of almost 7.5%, helping explain why the new fund has quickly gained a following.