MASTER LIMITED PARTNERSHIPS

Transcription

1 MASTER LIMITED PARTNERSHIPS An Overview November 2015 #

2 DISCLOSURE Investing involves risk, including the possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). MLP funds may invest in the energy industry, which entails significant risk and volatility. In addition, the funds may be nondiversified, which represents a heightened risk to investors. Furthermore, the funds may invest in small and mid-capitalization companies, which pose greater risks than large companies. Due to the nature of some MLP funds investments, the fund will be subject to taxation on its taxable income. The NAV of shares will also be reduced by the accrual of any deferred tax liabilities. The Underlying Index however is calculated without any deductions for taxes. As a result, the fund s after tax performance could differ significantly from the Underlying Index even if the pretax performance of the fund and the performance of the Underlying Index are closely correlated. MLP funds may be taxed as a regular corporation for federal income tax purposes. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor s return from an investment in the fund. The potential tax benefits from the fund's investment in MLPs depends largely on the MLPs being treated as partnerships for federal income tax purposes. As a partnership, an MLP has no federal income tax liability at the entity level. Therefore, treatment of one or more MLPs as a corporation for federal income tax purposes could affect the fund's ability to meet its investment objective and would reduce the amount of cash available to pay or distribute to you. There is no guarantee distributions will be made and dividends may be reduced or eliminated at any time. Furthermore, certain distributions are expected to be treated as a return of capital for tax purposes rather than from net profits and shareholders should not assume that the source of distributions is from the net profits of the fund. This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgement as of the date set forth above and are subject to change. Sources utilized for this information are believed to be accurate but no warranties are made to their accuracy or timeliness of reporting. Global X Management accepts no responsibility for the conclusions and decisions clients make utilizing this information. 1

3 ADDITIONAL DISCLOSURE Carefully consider MLPA and MLPX s investment objectives, risks, and charges and expenses. This and other information can be found in the fund's summary and full prospectuses. This and additional information can be found in the Funds' summary and full prospectuses, which may be obtained by calling GX-FUND-1 ( ), or by visiting Please read the prospectus carefully before investing. Global X Management Company LLC serves as an advisor to the Global X Funds. MLPX and MLPA are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company or any of its affiliates. Solactive Indexes have been licensed by Solactive AG for use by Global X Management Company LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds. Concentration Risk: Because MLPX and MLPA s investments are concentrated in the energy sector, the Funds will be susceptible to loss due to adverse occurrences affecting this sector or industry. To the extent that the Underlying Indexes concentrate in the securities of issuers in a particular sector or industry, the Funds will also concentrate its investments to approximately the same extent. By concentrating its investments in a sector or industry, the Funds face more risks than if it were diversified broadly over numerous sectors or industries. Such sector-based risks, any of which may adversely affect the companies in which the Funds invest, may include, but are not limited to, the following: general economic conditions or cyclical market patterns that could negatively affect supply and demand in a particular sector or industry; competition for resources, adverse labor relations, political or world events; obsolescence of technologies; and increased competition or new product introductions that may affect the profitability or viability of companies in a sector or industry. In addition, at times, such sector or industry may be out of favor and underperform other sectors or industries or the market as a whole. Non-Diversification Risk: MLPX and MLPA are classified as a non-diversified investment companies under the 1940 Act. As a result, the Funds are subject to the risk that they will be more volatile than a diversified fund because the Funds may invest their assets in a smaller number of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains and losses on a single investment may have a greater impact on the Funds NAVs and may make the Funds more volatile than more diversified funds. Global X MLP ETF (MLPA) Global X MLP & Energy Infrastructure ETF (MLPX) Management Fees Other Expenses (Deferred Income Tax Expense and Franchise Tax Expense) Total Expenses 0.45% 3.54% 3.99% 0.45% % 2

4 OUTLINE What is an MLP? MLP Landscape Investing in MLPs RIC MLP Funds Opportunity to Tax Loss Harvest 17 3

5 WHAT IS AN MLP? MLPs (master limited partnerships) are typically publicly traded partnerships: limited partnerships which are traded on stock exchanges Most current MLPs are in energy-related businesses: Exploration, development, mining or production, processing, refining, transportation, or marketing of any mineral or natural resource or transportation or storage of certain fuels 4

6 WHAT IS AN MLP? Since MLPs are partnerships, not corporations, there are key differences in taxation and distributions for investors to consider. MLPs Corporate Stock Investors Unit Holders Shareholders Entity Tax Status Pass-through, pays no income tax Pays Corporate Tax Tax Reporting K Distributions Partnership Distribution Dividends Selling Deemed disposition of underlying partnership assets Capital gain on sale of stock 1 K-1 or schedule K-1 is a tax form common among partnerships and other entities with pass-through taxation. The form reports the amounts of income that are passed through to each party that has an interest in the entity. 2 A 1099 is a form that reports income an investor received other than salary from an employer, such as interest and dividends. 5

7 WHAT IS AN MLP? MLPs broadly fall into one of three categories based on their area of focus Upstream Exploration & Production Horizontal drilling and fracking Potentially higher risk/higher reward business Benefits from high oil prices Midstream Storage & Transportation Natural gas and petroleum pipelines Toll road business model Less sensitivity to oil prices Downstream Refining, Marketing, and Distribution Interacts with end-consumer Benefits from lower oil prices 6

8 MLP LANDSCAPE The majority of MLPs are in the midstream infrastructure space, serving as key pipelines or storage and processing facilities. Sector 6.6% 21.0% Midstream Upstream Downstream Other 2.2% 70.2% Source: Yorkville Capital Management, as of 10/9/2015 7

9 Market Capitalization (Billions) Number of MLPs MLP LANDSCAPE Over 100 MLPs have been created, with the majority coming to market from Market capitalization of MLPs in excess of $500bn Market Cap # of MLPs Source: Yorkville Capital Management, as of 10/9/2015 8

10 INVESTING IN MLPS MLPs have become an increasingly common asset in diversified portfolios for three main reasons: Yield Potential Similar to Real Estate Investment Trusts (REITs), MLPs pay no income tax at the corporate level, leaving more cash flows available to investors Growth Potential MLPs stand to benefit from the US energy renaissance Diversification Opportunity MLPs have demonstrated low correlations to broad equity and fixed income indexes 9

11 INVESTING IN MLPS The method chosen for investing in MLPs can significantly impact returns, risks, distributions, and taxation. Buy MLPs Directly Potential Advantages Choose your exposures Avoid fund management fees Potential Disadvantages Must file Form K-1 in every state that an MLP operates Usually generates UBTI for tax advantaged accounts Use an Investment Vehicle Exchange Traded Fund (ETF) Exchange Traded Note (ETN) Closed End Fund (CEF) Mutual Fund Outsource investment decisions to fund advisor Avoid K-1s Management Fees Potential fund level taxes or credit risk UBTI: Unrelated business taxable income. Tax advantaged accounts are typically limited to less than $1000 in 10 UBTI, or risks losing its tax advantaged status.

12 INVESTING IN MLPS Each structure features different approaches and potentially advantages or drawbacks Intra Day Liquidity ETF Fund Level Taxation CEF ETN Mutual Fund Credit Risk Based on current MLP fund landscape. Active Management 11

13 INVESTING IN MLPS The method chosen for investing in MLP funds can significantly impact returns, risks, distributions, and taxation. Mutual Fund Closed End Fund ETF ETN Exposure Up to 100% MLPs Up to 100% MLPs Up to 100% MLPs Up to 100% MLPs (via note from a bank) Taxed at Fund Level Yes Yes Yes No Credit Risk No No No Yes Tax Reporting 1099 only 1099 only 1099 only 1099 only Active Management Yes Yes Some No UBTI No No No Under review by IRS 12

14 INVESTING IN MLPS For MLP ETFs, CEFs, and mutual funds, fund-level taxation can be a drag on returns in bull markets, but may help soften losses in bear markets Fund lags index because it must accrue a tax liability on realized & unrealized gains Fund can use its accrued tax liability to offset future losses, supporting returns in a bear market Returns pictured above are hypothetical and for educational purposes only. Indexes are unmanaged and it is not possible to invest directly in an index. 13

15 INVESTING IN MLPS With the recent bear market, many MLP funds have depleted their tax liabilities and are accruing tax assets. 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% # Liability Asset If a fund continues to fall and exhausts its tax liability, it will begin accruing a tax asset, and track the index one for one MLP Index MLP Index Fund 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Liability Asset The fund can use this tax asset to offset future gains, until the asset is exhausted and the fund must accrue a liability again MLP Index MLP Index Fund Returns pictured above are hypothetical and for educational purposes only. Indexes are unmanaged and it is not possible to invest directly in an index 14

16 RIC MLP FUNDS A new type of MLP fund has emerged that seeks to avoid fund-level taxation, while retaining high exposure to the MLP space Limited to 25% investment in MLPs Remaining 75% consists of General Partners of MLPs or other energy/infrastructure related corporations More focus on dividend growth than high dividends Potential Structure of an MLP RIC Fund MLPs <25% General Partners of MLPs >75% 15

17 OPPORTUNITY TO HARVEST LOSSES MLPs are experiencing their first down year since 2008, creating a rare opportunity for tax loss harvesting 350% MLP Total Returns since % 250% 200% 150% 100% 50% Potential tax loss harvest 0% Investors who have taken positions in MLPs since the beginning of 2013 potentially have losses available for harvest Source: Alerian MLP Index TR. 1/1/2009 to 10/2/2015. Ability to harvest tax losses will vary depending on investment structure, performance, amount of return of capital, and other factors. 16

18 OPPORTUNITY TO HARVEST LOSSES Two ETFs from Global X to consider swapping into: 0.45% management fee, lower than any competitor ETF 1,2 100% midstream MLP exposure 0.45% management fee, lower than any competitor ETF 1 No fund-level taxation 0.99 correlation between its underlying index and the Alerian MLP Infrastructure Index 3 1. Source: ETFDb as October 12, Fund is subject to substantial other expenses including but not limited to deferred tax expenses and franchise tax expenses. 3. Source: Bloomberg. Correlation between Solactive MLP Infrastructure Index from inception (March 24, 2015 to October 12, 2015). 17