Risks and Rewards of MLP Funds


"The quest for yield may explain why MLP ETFs are all the rage. . ."

The quest for yield may partially explain why MLP ETFs are all the rage these days. But do investors know enough about them?

Just as the Treasury bubble began to form and dividend income has lost luster, MLPs are taking over. Reuters' Helen Kearney reports that a range of new exchange-traded products and mutual funds has made it easier than ever for retail investors to access MLPs, sparking concerns of a bubble.

Some of the risks of MLPs include:
  • This market is new for many investors, and a flood of new focused products to give them easy access to these publicly traded partnerships may lead to a bubble if the interest becomes too intense.
  • With growing popularity comes growing prices, so be warned: MLPs may not always be inexpensive.
  • MLPs distribute the majority of their earnings to their shareholders; they rely heavily on being able to tap the credit markets to fund new projects. When the markets froze, the investments plunged.
There are rewards to investing in MLPs, too:
  • There is no taxation at company level, with deferred taxation on virtually all cash distributions to unit holders.
  • With an MLP ETN there is virtually no tracking error from underlying index; with an MLP ETF, you can get inexpensive exposure.
  • MLPs can deliver another level of diversification to your portfolio.
If you want to invest in one of the MLP funds, be sure you have a strategy in place. We use a simple trend-following strategy involving the 200-day moving average.

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