Master limited partnerships — or simply MLPs — have become the asset du jour for many investors seeking capital appreciation and tax-deferred high income. Many top-notch MLPs — like Kinder Morgan Energy Partners (KMP) — have seen their share prices surge, while many new pipeline and midstream firms have begun using the corporate structure to take advantage of the tax savings as well as investors interest.

Given the fervor, it’s only natural that Wall Street’s asset managers would want to join in the fun.

To that end, they’ve unveiled countless new ways for retail investors to the play the MLP space via exchange-traded funds and exchange-traded notes. That party hasn’t stopped, as fund sponsors continue to see a huge demand for their new products.

While most of these new ETFs have tended to tread the same ground as previously launched funds, the latest way to play MLPs from Global X could just be a better mousetrap for investors — as long as they know exactly what they’re buying.

It’s All About Structure

The brand new Global X MLP & Energy Infrastructure ETF (MLPX) hopes to overcome one of the biggest issues with various ETFs that track the midstream — high expenses due to taxes.

Popular MLP ETFs — like the $6.7 billion ALPS Alerian MLP ETF (AMLP) — are structured as C-corporations. Basically, investors buying shares of AMLP are actually buying shares of a company that owns nothing but other MLP units. And just like, say, beverage firm Coca-Cola (KO), MLP funds that are structured as corporations must pay corporate taxes. The deferred taxable liability that C-corp-based funds incur does impact returns, and results in much much higher expenses for investors.

Just how high? AMLP has a base expense ratio of 0.85% — or $85 per $10,000 invested. That’s not too bad, considering the uniqueness of the asset class. However, after adding in the fund’s “other expenses and taxable liabilities,” that cost rises to a whopping 4.85% per year! That makes the ETF one of the most expensive funds on the planet for investors to own. AMLP has lagged its benchmark by roughly 30% since its inception thanks to the tax liability incurred by the fund.

To combat the high expenses/double taxation of C-corp based ETFs, the new fund from Global X will be structured as a regulated investment company. Almost every mutual fund, closed-end fund and ETF on the market today is a RIC and, as such, isn’t subject to corporate taxes. Essentially, the fund is eligible to pass taxes on capital gains, dividends or interest earned directly to investors.

By using the RIC structure, Global X is able to drive down costs for investors. According to the new funds prospectus, MLPX will have an annual management fee of 0.45%, making it the cheapest way for portfolios to gain access to the MLP space.

Not Pure MLP Exposure

That lower expense ratio does come with one major catch — it’s not a “pure” play on the master limited partnership space.

Currently, legislation prevents open-end funds — i.e. RICs — to own more than 25% of their portfolio in MLPs. That means MLPX can’t be a fund focused entirely on master limited partnerships … it’s more of a total energy infrastructure play, and investors need to understand that.

The Global X fund will track the Solactive MLP & Energy Infrastructure Index. The new benchmark was created specifically for the fund to comply with applicable RIC diversification rules.

The 35-company index includes traditional MLP’s as well as MLP general partner affiliates and other energy infrastructure corporations. In plain English, that means there are plenty of pipeline companies that are traditional stocks included in the mix.

In fact, there are no actual MLPs among the fund’s five largest holdings — which include Kinder Morgan (KMI), TransCanada (TRP), Enbridge (ENB), Williams (WMB) and Spectra Energy (SE).

All of those firms do own plenty of midstream assets and have been benefiting greatly from the “drop-down” relationship with their respective MLP subsidiaries. However, as general partners, they are very different animals than their pass-through sisters. They are subject to different risks, volatility and dividend distribution requirements. Solactive MLP & Energy Infrastructure Index only yields around 3%, not the 6% that MLP investors are used to.

A Potential Portfolio Fit

Given that MLPX isn’t a “real” MLP fund, the question is whether it’s actually useful in a portfolio.

That really depends on what you’re looking for.

If you’re looking for a way to play America’s growing need for new energy infrastructure solutions and want an all-inclusive approach to that play, than the new MLPX — along with rival RIC fund the First Trust North American Energy Infrastructure (EMLP) — is a wonderful portfolio addition. Just keep in mind that this may be more of total return package, and the yield isn’t going to very high.

However, if you want strictly the high income and potential lower-volatility that MLPs can provide, then investing in the new fund will surely disappoint. The underlying index just isn’t designed to chuck out income. Funds like AMLP or the JPMorgan Alerian MLP Index ETN (AMJ) are better suited for that need.

The bottom line is that MLPX’s dirt-cheap expense ratio is great … but only if you understand what you’re buying.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.