A 14% Yield From Pipelines: The Energy Infrastructure ETF Built for Monthly Income

Infrastructure has long been a meaningful allocation for institutional investors. Pension funds such as CalPERS invest directly and through funds in infrastructure, viewing real assets as a potential source of predictable cash flow, diversification, and inflation protection. Large alternative-asset managers have built substantial businesses around the same idea. Blackstone, for example, currently reports about $90 billion in infrastructure assets under management across areas including energy, transportation, digital infrastructure, water, and waste.

For ordinary investors, one of the easiest ways to get similar exposure to energy infrastructure is through master limited partnerships, or MLPs. These publicly traded partnerships can own pipelines, storage terminals, processing facilities, and other assets involved in moving and handling oil and natural gas. Many operate toll-road-like business models where cash flow depends partly on volumes and contractual fees rather than simply making a directional bet on commodity prices.

MLPs can also produce substantial distributions because of their partnership structure and the depreciation associated with their infrastructure assets. But I’d hesitate before simply buying a handful of individual MLPs for the yield. The tax treatment is considerably more complicated than owning an ordinary dividend stock.

That’s why I think the NEOS MLP & Energy Infrastructure High Income ETF (MLPI) offers an interesting compromise. It combines MLP and energy infrastructure exposure with an options overlay, currently producing a 14.19% distribution rate paid monthly.

Why I Don’t Like Owning Individual MLPs

The biggest headache with individual MLPs is tax reporting. Buy an MLP and you’re purchasing partnership units, which generally means receiving a Schedule K-1 instead. A K-1 can report your share of several different categories of partnership income, deductions, gains, and losses. Your tax basis also needs to be tracked as distributions, depreciation, and other partnership items accumulate over time. Selling can create additional complications because portions of the gain may receive different tax treatment.

None of that makes MLPs inherently bad investments. I just don’t particularly want the administrative burden when an ETF can simplify it. However, some pure-play MLP ETFs solve the K-1 problem in a different way that I don’t particularly like either. If an ETF owns too much in MLPs, it generally can’t maintain the usual regulated investment company structure used by most ETFs.

Some MLP funds therefore operate as taxable C corporations. That can introduce taxes at the fund level. The ETF may also record deferred tax liabilities when its MLP holdings appreciate, creating another source of tracking error. You may avoid receiving a stack of K-1s, but the solution can introduce a different form of tax drag and accounting complexity.

How MLPI Gets Around the Problem

MLPI takes a different route by limiting direct MLP exposure to 25% of the portfolio, with the remainder invested across other energy infrastructure companies. That allows the fund to preserve conventional ETF tax treatment and provide shareholders with Form 1099 reporting rather than individual K-1s. The ETF charges a 0.68% expense ratio and pays monthly

NEOS then adds another source of income through an actively managed call-option strategy. Energy infrastructure equities can be volatile, and options premiums tend to increase with volatility. MLPI attempts to monetize some of that volatility by selling calls while retaining underlying exposure to the companies.

The result is considerably more cash flow than the portfolio’s underlying dividends alone would produce. As of Aug. 31, MLPI had a 14.19% distribution rate and a 3.47% 30-day SEC yield. The difference is important: that 14.19% figure reflects the fund’s annualized distribution rather than the underlying investment income measured by the SEC yield.

There can also be a useful tax characteristic to those distributions. According to MLPI’s September Section 19(a)-1 estimate, approximately 95% of its latest distribution was classified as return of capital (ROC). ROC generally reduces an investor’s adjusted cost basis rather than creating an immediate tax liability. That can defer taxation until shares are sold or basis reaches zero, at which point subsequent ROC is generally treated as capital gain.

That doesn’t mean 95% of every future MLPI distribution will receive the same treatment. Section 19(a)-1 notices are preliminary book estimates and aren’t intended for tax reporting. NEOS specifically notes that final characterization can differ, with shareholders receiving the eventual tax treatment on Form 1099-DIV.

I’d also keep the 14.19% distribution in perspective. Covered calls can limit participation in strong rallies, MLP and energy infrastructure stocks remain exposed to industry and market risks, and a large distribution isn’t equivalent to a 14% expected total return.

What MLPI does offer is an unusually convenient package. You get publicly traded pipeline and energy infrastructure exposure, direct MLP holdings kept below the threshold that creates the C-corporation problem, 1099 reporting, and an options overlay designed to convert some of the portfolio’s volatility into additional monthly cash flow.

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