MLPs Are Rallying—But They're Still Risky

Ted

FYI: (Click On Article Title At Top Of Google Search)
IInvestors who bought master limited partnerships years ago, thinking they had found a high-yielding bond substitute with tax advantages, have been sorely tried. Those who held on through the 18-month downturn have gotten some welcome relief these past 10 weeks as the sector rebounded from its staggering 60% plunge from 2014 highs.
Regards,
Ted
https://www.google.com/#q=MLPs+Are+Rallying—but+They’re+Still+Risky+Barron's

rforno

Sigh. Another one-size-fits-all broad-brush headline that distracts from the fact that there are several good MLPs that are safe/fairly safe and viable holdings for long term investors. EPD, SEP, MMP come to mind -- I own the first 2 in large quantities.

kevindow

@rforno,

For common investors, are there any attractive MLP mutual funds/ETFs to cover the MLP space with one holding ? Thanks.

Kevin

wxman123

I like TTP in this space.

dryflower

FUN has been quite fun.

Mark

@Kevin - there are many different types of MLP's:

http://www.forbes.com/sites/advisor/2014/09/30/what-you-need-to-know-about-mlps-and-investing-in-energy/#65d10d5fc4ee

but I think that you will find that most of the funds/ETF's built around them tend to be heavily populated with midstream energy companies. See: GLPAX

I guess that one has to decide what it is they actually want to hold before any specific fund can be either suggested or chosen. Personally I have found them lacking - high er's, low distributions, poor construction/composition and have therefore just invested in certain individual companies.

rforno

@kevindow Check out some of the closed-end funds from Tortoise (TPZ, TYG, NTP, etc.) I've owned some of them off and on over the years but now just hold a few individual MLPs.

jstr

Energy's seasonal idiosyncracies ( summer driving demand, refinery maintenance, supply flows ) have produced a decent returns when used within a simple, tactical 3 sector switching framework. 2016 has been exceptional. https://docs.google.com/spreadsheets/d/1NrMJ1hs2zhLrXc-WgjdbA_0uf0KUPzvKdgKUJZvyFCM/edit?usp=sharing

kevindow

Thanks to all for the excellent advice.

As a pure short-term trade, I bought AMLP on 2/18/16 merely because it gave me decent exposure to the MLP space and most importantly, it was very liquid.

I have purchased CEFs before, but I never was comfortable with the discount/premium issue, and felt that smarter investors would game me. And I don't have the time or expertise to carefully research individual MLPs. I really want one mutual fund/ETF/ETN to cover the MLP space.

So after reading THIS and THIS, I am leaning toward owning AMJ or EMLP in my retirement account. Between the two, I am leaning toward EMLP due to the risk metrics, although EMLP is not a pure MLP play.

Kevin

heezsafe

@kevindow You might want to check this one out; MLPs are kind of Simon Lack's thing:

http://www.sl-advisors.com/wrong-mlp-fund/

For those who follow MLPs closely, one of the enduring mysteries must be the mindset of investors in the Alerian MLP ETF (AMLP). Investors who desire MLP exposure but don’t want K-1s have been attracted to AMLP and a whole host of other inefficient ETFs and mutual funds. As we’ve written before (see, for example, The Enormous Misunderstanding About MLP Funds and Taxes), funds such as these convert the K-1s they receive into the 1099s desired by their investors by paying corporate income tax on their returns. The result is that an investor in a C-corp MLP fund such as this earns substantially less than the index – somewhere close to 35% less since that’s the portion ultimately paid to the U.S. Treasury.
[...]
The Mainstay Cushing MLP Fund (CSHAX) is similarly structured and invariably underperforms its benchmark. Portfolio Manager Jerry Swank was asked by Barron’s in June 2012 why the fund had lagged its benchmark since inception in 2010 and he replied, “As a corporation, what a mutual fund gives up is a tax drag on the net asset value, as much as a 38% tax drag on NAV.” CSHAX has an expense ratio of 9.42%, of which 7.94% is taxes. The questioner should have asked, ‘Can you really claim to put investors’ interests first if you design a vehicle like this?’ Instead she moved on, but really; who seriously expects a mutual fund to pay away almost 8% of its clients’ capital in taxes?
[...]
These securities and others like them (we calculate there are around $20BN outstanding) are deeply flawed. They exploit the unfortunate proclivity of many investors towards superficial research and while their shortcomings are disclosed in documents they’re certainly not understood by their investors.

You also might find an article he wrote in January to be enlightening re. how the various tax issues for these investment vehicles came to be. It certainly cleared up some lingering confusions I had.
http://www.sl-advisors.com/2015-mlp-crash-whats-next/

BenWP

There's CEM, the CEF in the MLP space. I got burned with it, tho it has recovered. No K-1 form to deal with at tax time. A CEF in a volatile area of the market requires Peptobismal (do they still sell that stuff?).

kevindow

@heezsafe,
Thanks so much for those eye-opening articles. I had no idea. Right now I am definitely leaning toward EMLP, which does not appear to have the same tax issues as AMLP. Simon Lack has a nice mutual fund -- MLXIX -- but I cannot buy it at Wellstrade.

CHART

Kevin