Why are MLPs out of favor?

Why MLPs Fell Out of Favor

Master Limited Partnerships (MLPs) were once darlings of the energy infrastructure world, offering high yields and steady cash flows from pipelines and storage facilities. But in recent years, they’ve lost much of their luster—especially among retail investors. One major reason? The tax structure that once made MLPs attractive became a liability for fund investors.

MLP-dedicated mutual funds and ETFs were created to give everyday investors access to the sector without dealing with the headache of K-1 tax forms. At first glance, that seemed like a win. But there was a catch: when a regulated investment fund holds more than 25% in partnerships—like MLPs—it loses its pass-through status and gets hit with corporate income tax.

This tax burden is passed down to investors in the form of lower returns and messy tax implications. As a result, many MLP funds underperformed their benchmarks, even when the underlying assets were doing fine. Investors ended up paying more in taxes while earning less—something few were willing to tolerate.

The problem intensified during periods of low energy prices or market volatility. MLPs, heavily concentrated in midstream energy, faced pressure from shifting energy policies, ESG trends, and competition from renewables. Distributions were cut, balance sheets weakened, and investor confidence wavered. Meanwhile, simpler alternatives—like C-corp energy stocks or diversified energy ETFs—offered similar exposure without the tax complexity. Many fund managers responded by closing MLP-specific products or restructuring their offerings.

Today, MLPs haven’t disappeared, but their role in portfolios has narrowed. The lesson? Even a strong business model can stumble when tax mechanics and investor accessibility collide. For now, the MLP era of broad retail appeal seems to have quietly receded into the background.