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 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.