These days, many investors need as much investment income as they can find. Master limited partnerships have gained popularity in recent years precisely because they deliver lucrative income streams to their investors -- and often come with valuable tax benefits.
But even as we close the books on another tax season, the shortcomings of owning MLP units will likely remain on the minds of unitholders for some time. Below, I'll talk about some new exchange-traded funds that hope to get rid of those tax nightmares for good. But first, let's take a look at MLPs and the pros and cons of investing in them.
Feel the energy
High oil prices and a booming supply of natural-gas drilling have made oil and gas investments extremely popular. Many energy stocks feature attractive yields as a result, especially those focusing on oil and other liquids, where prices are particularly high.
But many energy companies pay huge amounts of taxes, offsetting their profits and reducing how much they have available to pay dividends. One way to get a tax advantage is to invest in what's known as pass-through entities, of which MLPs are an example. Because they qualify for favorable tax treatment, MLPs don't have to pay taxes like corporations do. They instead have to tell their unitholders what their respective share of each MLP's income is, and the investors then have to report that income on their own individual tax returns.
Avoiding the double taxation of being a corporation is a definite plus for MLPs and their investors, as well as the impact lower taxes have on their yields. Inergy
The ETF "solution"
Late last year, I wrote about how Alerian MLP ETF
The new ETFs that focus on MLP investment use the same corporate structure as their Alerian counterpart. Both Global X MLP ETF and Yorkville High Income MLP ETF include provisions in their prospectuses that discuss the potential impact that their corporate tax liability will have on their net asset values, so it's reasonable to conclude that they'll face similar return shortfalls.
Pick your poison
Of course, even 13% annual returns sound pretty good in the current market environment, so you might be inclined to say that saving the tax hassle is worth it. Moreover, the tax impact also acts as a brake on declines as well, as it allows the funds to reduce their tax reserves.
But the complications are just another way that investors can get surprised by complex investments. Just as United States Natural Gas
MLP ETFs save you from tax hassles, but at the severe cost of a big tax hit. Before you invest, you have to decide whether reduced returns are worth the convenience that MLP ETFs provide.
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Fool contributor Dan Caplinger hates hassles. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is always hassle-free.