Since the inception of the Investment Company Act of 1940, investors have grown to expect every mutual fund, closed-end fund (“CEF”), and exchange traded fund (“ETF”) to be treated as a “pass-through vehicle” for tax purposes. The entity itself would not pay any taxes, and all tax liabilities would be passed-through to the shareholders.
That was the status quo for decades, until master limited partnership (“MLP”) funds came along. They went against the status quo without any warning, and with the implicit blessing of the SEC. MLP funds are not pass-through vehicles. They are C-corporations liable for both federal and state income taxes – estimated to be about 37% of all taxable income. Shareholders then have to pay taxes on any gains and dividends they receive, typically adding about 30% or more to the overall tax bill. For every $1.00 in taxable income the corporation receives, the shareholder gets about $0.63. After shareholders pay 30% in taxes, they are left with about $0.44.
Why the SEC allows these corporations to call themselves ETFs and mutual funds is beyond me. These products are tarnishing public perception of what investors have come to expect over the last 73 years. For the first year or so, I was the lone voice alerting the public about the horrendous expenses of these C-corporations masquerading as ETFs. Some sponsors even tried to shut me up.
MLP funds have been exploiting accounting loopholes in order to keep investors in the dark about their true expenses. However, it is now catching up with them. There are currently five MLP ETFs listed for trading on U.S. exchanges. Each one uses the C-corporation structure, and all were forced to finally issue their semi-annual reports dated May 31, 2013.
For the first time, the impact to shareholders is starting to show up in the expense reports. However, there is still a long way to go before we have full disclosure in this segment of the market.
| Corporation Name | Ticker | Advertised Expense Ratio | Prospectus Expense Ratio | Semi-Ann Report Expense |
|---|---|---|---|---|
| Alerian MLP ETF | AMLP | 4.85% | 4.85% | 11.73% |
| Global X Junior MLP ETF | MLPJ | 0.75% | 0.75% | 8.88% |
| Global X MLP ETF | MLPA | 3.52% | 3.52% | 11.15% |
| Yorkville High Income Infrastructure MLP ETF | YMLP | 0.82% | 0.82% | 6.86% |
| Yorkville High Income MLP ETF | YMLI | 0.82% | 0.82% | 6.34% |
Note: All data provided directly from the funds: Advertised Expense Ratio as displayed on primary overview page, Prospectus Expense Ratio from most current prospectus, and Semi-Ann Report Expense from the May 31, 2013 Semi-Annual Reports.