How To Be Tax Savvy With An MLP ETF

With the end of the year right around the corner, advisors and investors are considering tax-loss harvesting and selling. Perhaps some are considering which exchange traded products to move into after they ditch losing equity and fund positions.

The master limited partnership (MLP) exchange traded fund space is a predictable candidate for some year-end tax-loss selling. After all, the Alerian MLP ETF AMLP, the largest MLP ETF, has plunged 29.1 percent year-to-date. Investors looking to drop one MLP ETF while looking to remain involved in the space can give the Direxion Zacks MLP High Income Shares ZMLP a look as a potential destination.

Today, there are more than 25 MLP ETFs on the market with more than $25 billion in combined assets under management.

ZMLP follows the Zacks MLP Index “which is composed of approximately 25 master limited partnerships (MLPs) listed on North American stock exchanges. The index’s holdings are selected using a quantitative, rules-based methodology developed by Zacks to eliminate MLPs with insufficient share prices, market capitalizations and liquidity. All companies in the index are equally weighted so that each holding constitutes 4 percent of the ETF’s portfolio, which is rebalanced on a quarterly basis,” according to Direxion.

Though it has been drubbed along with other MLP ETFs, ZMLP offers leadership potential in the event oil prices and MLPs rebound next year. Additionally, there are tax advantages because ZMLP is not subjected to deferred tax liability due to its year-to-date stumble.

“ZMLP is different than the rest in that it is equal weighted and looks at down, mid and upstream names. The goal is to generate an attractive yield or dividend for investors. While past performance is not indicative of future results the etf had an annualized distribution rate paid quarterly,” said Direxion. “Since MLP etfs have performed poorly over the past year, many like ZMLP are not recognizing deferred tax liability at the moment. If you are bullish on MLPs after this year’s pullbacks, it might be a good way to recognize income.”

MLPs typically are not engaged in the exploration and production of oil and petroleum-related products. MLPs' business models are more dependent on the volumes of natural gas and oil moving through their pipelines than commodities prices – so conventional wisdom previously dictated. 

ZMLP “debuted back in January of 2014, so will soon be celebrating its two year live anniversary and up to this point has raised about $72 million in assets under management. We would not be surprised to see a name like this, which is not market-cap weighted like most of the alternatives within this space, given the embedded, oversized losses year to date that some investors in the segment may wish to realize, pick up in trading activity going into year’s end as advisors and institutions may shift portfolio holdings around in what are typically known as 'tax swaps,'” said Street One Financial Paul Weisbruch in a recent research note.