Tuesday, July 27, 2010

Why You Should Avoid MLP ETFs Until the "Froth" Subsides

Wall Street is going crazy for MLPs these days!  The safe, stable, dividend yield of a master limited partnership (MLP) is all the rage right now with investors.  Which is precisely the reason you might want to steer clear of this sector for a bit.

Tom Dyson elaborates in his Daily Wealth column:
Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea... and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they're about to enter a severe correction.

So what's the hottest new ETF sector right now? It's master limited partnerships...

A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status... including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.
You can read Tom's full piece here.

If the stock market tanks again - as we're anticipating here - then MLPs might be a great place to look for stable, 10%+ dividend yields.  But at just 6%, I agree with Tom that you're probably best served until some of the current froth is blown off.

More on ETF launches as contrarian indicators:
Ed. Note: This article was originally published in our sister publication, The Contrary Investing Report.

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