What is an MLP?
Introduction
In the United States, a master limited partnership ("MLP") is a limited partnership that is publicly traded, also known as a publicly traded partnership. Under the U.S. internal revenue code, any partnership, including a publicly traded MLP, is not subject to tax at a partnership or "corporate level". Instead, each partner in the partnership is personally responsible for paying tax on his or her share of the partnership's income. Because MLPs are not subject to corporate taxation, they act as pass-through entities. If they generate net income, it must be distributed to the partners in order to avoid taxation at the partnership level. Because of this special pass-through status, most MLPs have higher dividend rates than your typical common stock of a C corporation.
To obtain the tax benefits of a pass through, MLPs must generate at least 90% or more of their income from qualifying sources, as specified in the Internal Revenue Code. Most MLPs are in the energy business, so to many investors the term MLPs is synonymous with energy companies. But there are a few other kinds of MLPs, mostly in the financial services industry.
See our list of MLPs.
Complicated tax situation for investors
When someone buys shares in an MLP, the investor becomes a "limited partner" in a partnership. The investor is sharing in the gains or losses of that partnership, which imposes some special tax accounting requirements on the investor. Many first-time investors in MLPs do not understand that.
Since partnerships don't pay tax at a "corporate" level, a partnership must allocate its income to each of its partners, including limited partners. At the end of each year, a partnership prepares a federal form K-1 which allocates the partnership's income for the year to each of it's partners. Each partner, including the limited partners, must report on their income tax return their share of the partnership's earnings. These earnings are taxed at the investor's tax rate for ordinary income. So this creates a slightly more complicated income tax return for an investor. Note that the income allocated to each limited partner on the K-1 is different than the amount of dividends the investor has received. An investor may have to pay tax on partnership earnings, even if the investor never received any of the MLP's dividends.
Because each partner has already paid tax on their share of the partnership's earnings via the K-1 reporting process, a "dividend" from an MLP is treated much differently than a dividend from a common stock. MLP dividends, which should probably be referred to as a distributions, are usually considered to be a return of capital, and thus aren't taxable to the individual MLP investor. Distributions from an MLP reduce an investor's basis, or "cost" in the shares of the MLP. So when the investor eventually sells his or her shares in the MLP, the investor's net gain will be higher because of the effect of the cumulative distributions reducing his or her's basis in the shares.
Does owning an MLP in an IRA or retirement account avoid the complicated tax situation? Not really. There is something called Unrelated Business Income Tax (UBIT), which can arise when a tax-advantaged account directly invests in MLPs. UBIT is generated when Unrelated Business Taxable Income (UBTI) exceeds $1,000 in a given year, as the tax is designed to prevent unrelated business activity within a tax-exempt vehicle such as an IRA or 401(k).
Robert Baird published a good overview of the common tax questions related to owning an MLP: read now.
Distinct asset class
Most popular stock market indexes, like the S&P 500, NASDAQ-100 and Russell 1000, do not include MLPs in the list of eligible securities - such indexes typically only include common stocks, REITs and mortage REITs. And most broad market U.S. exchange traded funds ("ETFs"), which track all kinds of different stock market indexes, also do not include much MLP exposure, if at all. So MLPs are a distinct asset class apart from common stocks that every investor should be aware of and think about.
MLPs are also unique because of their concentration in the energy sector. Most MLPs are engaged in the oil and gas industry. Here are the MLPs in our database classified by sector:
| Category | Stock count | Total market cap | % |
|---|---|---|---|
| Energy | 29 | $273B | 87.37% |
| Real Estate | 5 | $5.01B | 1.60% |
| Basic Materials | 3 | $2.41B | 0.77% |
| Financials | 3 | $4.51B | 1.44% |
| Utilities | 2 | $8.19B | 2.62% |
| Industrials | 1 | $1M | 0.00% |
| Consumer Cyclicals | 1 | $4.88B | 1.56% |
| Consumer Non-Cyclicals | 1 | $14B | 4.63% |
| Total | 45 | $312B | 100.00% |
Size categories
Although there are some large MLPs, MLPs on average tend to skew a little smaller than U.S. common stocks. Here's a breakout of MLPs by size category:
| Category | Stock count | Total market cap | % |
|---|---|---|---|
| Large cap | 6 | $231B | 74.09% |
| Mid cap | 12 | $58B | 18.78% |
| Small cap | 20 | $21B | 6.87% |
| Micro cap | 7 | $806M | 0.26% |
| Total | 45 | $312B | 100.00% |
As explained in our article size categories, there is no standard definition of what makes up a "large cap" stock. On our website, we use: large cap > $10 billion, mid cap between $2 billion and $10 billion, small cap between $300 million and $2 billion and micro cap <$300 million.
ETFs and ETNs related to MLPs
As explained above, most U.S. stock market indexes do not include MLPs in their list of eligible securities. So most U.S. stock ETFs and ETNs also don't include exposure to MLPs, because they focus on common stocks and REITs. But there are a few ETFs and ETNs that specialize in MLPs:
| Name | Symbol | Last price | Currency |
|---|---|---|---|
| Global X Funds | ARCX:MLPA | 48.84 | USD |
| ETFis Series Trust I | ARCX:AMZA | 41.65 | USD |
| ETRACS Quarterly Pay 1.5X Leveraged Alerian MLP Index ETN | ARCX:MLPR | 58.90 | USD |
| ALPS Fund Services | ARCX:AMLP | 47.55 | USD |
| Global X Funds | ARCX:MLPX | 59.60 | USD |
| region | BATS:ATMP | 27.88 | USD |
| ETRACS Alerian Midstream Energy Total Return Index ETN | ARCX:AMTR | 76.66 | USD |
| ETRACS ALERIAN INFRAST SER B | ARCX:MLPB | 24.77 | USD |
| ETRACS Alerian MLP Index ETN | ARCX:AMUB | 18.18 | USD |
| UBS AG ETRACS Alerian Midstream Energy High Dividend Index ETN | ARCX:AMND | 53.54 | USD |
| Alerian Energy Infrastructure ETF | ARCX:ENFR | 30.60 | USD |
| USCF Midstream Energy Income Fund ETF | ARCX:UMI | 49.18 | USD |
| ETRACS Alerian Midstream Energy Index ETN | ARCX:AMNA | 53.58 | USD |
Note that when you see a market cap of $0, that means we don't have data available for that ETF.
Note that there are a lot of ETNs related to MLPs. As explained in our article what is an ETN?, an ETN is a special type of publicly traded debt issued by a large investment bank that pays "interest" based on the returns of a stock market index. There are probably so many ETNs related to MLPs because an investor can buy an ETN and gain exposure to MLPs without being subject to being treated as a "limited partner" who must pay tax based on a K-1. Buying an ETN avoids the complicated tax situation associated with MLPs.
Note also that the ETFs related to MLPs can be organized as C corporations and subject to tax at a fund level. No other ETFs are subject to tax at a fund level. But by organizing themselves as a C corporation, an MLP ETF handles the tax complexity of owning an MLP. So an investor in a MLP ETF doesn't have to worry about the tax complexities of owning an MLP.
Here are the ETFs that are organized as C corporations:
There are some challenges when trying to compare the performance of ETNs and ETFs in the MLP space, especially when an ETF is structured as a C corporation. For one thing, dividends from a C corporation ETF are net of tax. Also, a C corporation ETF may not accurately track the MLP index it follows, because of the effect of recording tax at a corporate level. A C corporation ETF records "deferred taxes" on its balance sheet, which reduces the fund's NAV, and thus it doesn't accurately track the index it is following. So be careful when comparing the returns of ETFs and ETNs in the MLP space.