How to Invest in Master Limited Partnerships

An investor can invest in MLPs directly by purchasing the units from the stock exchange or through exchange-traded funds, exchange-traded notes, and mutual funds.

ETFs offer diversification and liquidity. ETFs hold units in the underlying MLPs and they trade like stocks. The Alerian MLP ETF (AMLP) is the largest MLP ETF and it invests in 50 energy MLPs. Top holdings include Enterprise Products Partners (EPD), Williams Partners (WPZ), Energy Transfer Partners (ETP), and Plains All American Pipeline (PAA). These MLPs have a combined weight of 37.85% in AMLP.

ETNs operate as index-linked bonds. ETNs pay coupons linked to the distribution of MLPs tracked in the underlying index. They provide tax efficiency, as capital gains are deferred until the units are sold. Some of the well-known ETNs investing in MLPs are the JP Morgan Alerian MLP Index (AMJ) and the ETRACS Alerian MLP Infrastructure Index ETN (MLPI).

Capital invested in closed-end funds stays in the form of tradable shares. These shares can trade at a premium to the underlying shares because of the active management. Taxes for closed-end funds are the same as they are for investing in MLPs directly. The ClearBridge Energy MLP Total Return Fund (CTR) is a well-known closed-end fund.

These funds offer daily liquidity on both entrance and exit. If the investor wants to close the position in the fund then the underlying MLP’s position needs to be sold to meet redemption. The Alerian MLP Infrastructure Index Fund (ALERX) is a well-known mutual fund.

Some of the largest MLPs that are part of all the funds are Enterprise Products Partners (EPD), Williams Partners (WPZ), Energy Transfer Partners (ETP), and Plains All American Pipeline (PAA). These MLPs have a combined weight of 37.85% in the Alerian MLP ETF (AMLP).

In the next article we’ll discuss the types of contracts prevalent in energy MLPs.