If you’re the least bit familiar with Master Limited Partnerships (MLPs), you know that they have a funny quirk to them; they annual provide you with a strange tax form called a K-1 schedule and at times can require you to pay taxes to the states the MLP operates in.  If these factors pose enough trouble to drive you away from such an investment, an alternative exists.

The reason why MLPs are quite popular is because over the past 15 years the group has averaged a 17% annual gain.  This is enticing to many investors, especially investors looking for regular income distributions, since MLPs are known for their large dividend yields.

How do you get in on this class of investments that has performed well overtime without the tax filing problems?  As you may have guessed, a few Exchange Traded Funds (ETFs) exist that hold a basket of MLPs.  Being an owner of an ETF is straight forward with the regular 1099 form arriving at the end of ever year.

The two main MLP based ETFs are the Alerian MLP (AMLP) and the JPMorgan Alerian MLP Index (AMJ) (this one is actually an exchange traded note.) .They both carry a .85% annual expense ratio.  The AMLP fund currently boasts a dividend yield of nearly 6% and the AMJ fund at nearly 5%.  Since AMLP’s inception around September 1, 2010 until July 15, 2011, the fund has actually lagged AMJ by about 7% in per share price performance.

MLP ETF Performance

In addition investors will also receive instant diversification by investing in either fund.  The cost of this advantage is that you will forgo the higher yields you could obtain in you shopped for a few specific MLPs to purchase.

Being that funds exist to capture the benefits of MLP investing, no investor should feel that they cannot take part in this arena for fear to fax complications.  MLPs often provide some of the more stable returns in the market because their businesses lines often focus on key components to economies around the world.  For instances, it’s very common to find an MLP owning a large amount of oil or gas transmission pipelines in a certain geographic region.  They may never take ownership of the fuel, but the line they own generates revenue, since it must be used for transportation.

If MLPs sound interesting to you, I’d start with the funds listed and then either consider other funds or identify specific companies to invest in.

For more information visit previous posts; Master Limited Partnerships or Best & Worst Master Limited Partnerships of 2010

Note: I did not cover a couple other tax reporting ramifications that might impact you when choosing to invest directly in an MLP or with an MLP fund.  Consult your tax adviser for more information.