ETF to Dump No. 2: Alerian MLP ETF (AMLP)

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As I've said before, master limited partnerships, or MLPs, are often a great investment. They typically have high dividend yields and have generated significant capital gains the past few years.

So what's the problem with Alerian MLP ( AMLP)?

Well, it is the only ETF on the market that is not a pass-through entity for tax purposes. AMLP is structured as a C corporation, which means it pays 35% federal taxes plus various state taxes on all its gains. The roughly 1,000 other ETFs and ETNs pay none.

The result: AMLP significantly underperforms its competition and its benchmark.

The impact of "tax drag" on this fund is staggering .

The sponsor handles it by clipping off about 37% of each day's price move, leaving investors with only 63%. Investors may also be slammed with additional taxes when they sell their AMLP shares.

While there is no perfect way to access MLPs with exchange-traded products, the way AMLP does it is unquestionably the worst.

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