What are the differences between the MLP exchange-traded Fund (etf) and MLP exchange-traded note (ETN)?


The main difference between a master limited partnership (MLP) exchange-traded Fund (etf) and MLP exchange-traded note (ETN) is the tax implications of each asset. How MLP etfs and ETNs track an underlying MLP index.

Master Of The Society Of Exchange Partnership Funds

MLP etfs are often structured as corporations. These corporations pay income tax on the distribution before they are passed to investors, which reduces performance in real-time. One of the distinct advantages of MLPs is their pass-through tax structure, where there are no taxes paid on the level of partnership, avoiding double taxation. From paying corporate taxes on the structure in real time, this advantage is negated. This means that the MLP has a significant tracking error relative to the underlying MLPs.

MLP exchange-traded notes

MLP ETN is organized as unsecured debt issued by a Bank that tracks the MLP index. This allows you to avoid paying corporate taxes leads to better tracking. The disadvantage of this structure is the distribution treated as taxable income, which has certain tax implications.

With a Frank share of MLP distributions are not taxed as ordinary income at the time of their receipt. On the contrary, the distribution is the reduction in the value of investments. No taxes on distributions postponed until until the MLP interest is transferred. Due to the significant depreciation and other tax deductions MLPs, distributable cash flow often exceeds taxable income, creating an effective tax deferral.

Most MLPs in the energy sector because of certain restrictions Congress placed on the use of the structure of the MLP in 1987. These MLPs often have large capital investments in gas and oil pipelines and storages that implement depreciation on an annual basis.

The advantages of MLP etfs and ETNs

If the MLP interest passes to the heirs of the holder, on the basis of the value of MLP units is adjusted to the value at the date of the transfer. This eliminates any tax liability associated with the return of capital distribution was to be made. This can be a powerful estate planning tool if used correctly, and are not available to those who own MLP shares directly rather than in real time or ETN.

As in real-time and ETN allows investors to avoid file K-1 tax forms, which is an advantage. K-1 is required for distributions derived from direct ownership of MLP, which can complicate tax returns for many investors. Investors are not considered business owners since they are partners with limited liability.

In addition, MLP etfs and ETNs can be held in an individual retirement account (Ira) without negative tax consequences. If the MLP units are held directly in an Ira, the tax office determines the distributions from MLPs as taxable income that must be paid per year is realized. This cancels the deferred tax benefits of MLP distributions. Thus, it is possible to highlight the advantages of etfs and ETNs for investors who want MLP investments in IRAS.

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