MLP ETFs Endure Rough First Quarter, Global X Says New Tax Rule Could Help

After swooning for much of 2017, energy stocks and exchange traded funds are struggling to start 2018. Master limited partnerships and related ETFs have not been immune to those struggles. For example, the Global X MLP & Energy Infrastructure ETF MLPX is sporting a first-quarter loss of 5 percent.

MLPX now resides 6.6 percent below its 50-day moving average, 6.7 percent below its 200-day line and more than 17 percent below its 52-week high. Still, there are some reasons to monitor MLPs, including overlooked provisions in the new tax reform legislation.

"First, the immediate expensing provision, also known as bonus depreciation, allows for businesses to immediately fully expense capital expenditure spending over the next five years,” Global X said in a recent research piece. “Previously, businesses were limited to depreciating 50 percent of an asset’s value in the first year. Given that MLPs are capital-intensive businesses, it’s possible this more aggressive depreciation schedule could spur additional spending on growth projects.”

More Details

MLPX, home to nearly $414 million in assets under management, follows the Solactive MLP & Energy Infrastructure Index. The ETF, which debuted almost five years ago, holds MLPs, general partners of MLPs and energy infrastructure companies. By not holding exclusively MLPs, MLPX avoids the tax issues and high expenses associated with some dedicated MLP funds.

“MLPX invests in midstream infrastructure entities such as pipelines and storage facilities that have less sensitivity to energy prices,” according to Global X.

While MLPs and energy infrastructure can provide some insulation from declining energy prices, that has not been the case over the past 12 months. Over that period, MLPX is lower by more than 9 percent, a loss far more severe than those incurred by traditional, diversified energy equity ETFs.

Waiting It Out

Investors considering MLPs and related ETFs may need to exercise some patience. Those already involved with the asset class are being compensated in the form of increased income. For example, the trailing 12-month dividend yield on MLPX is north of 8 percent.

“While investors can immediately enjoy the benefits of lower effective tax rates, over the longer term, the spotlight will be on MLP management teams and how effectively they incorporate the tax law changes into their firm’s overall strategies in order to maximize unitholder returns,” said Global X. “We expect tax reform to have a wide-reaching impact on the management of MLPs, affecting decision making on corporate structure, capital expenditures, and sources of financing.”

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