I often review newly launched exchange-traded funds, but today I'm looking at a fund that's been around for a while: GraniteShares HIPS US High Income ETF (HIPS) .
In December 2017 ETF issuer Granite Shares became the new advisor for what used to be called the Master Income ETF. Once in Granite Shares' hands, the fund underwent some changes. It was renamed HIPS and, the index underwent some modifications. This fund was originally launched in February 2015 and tracked what was then the TFMS HIPS 300 Index, which included 300 names across various asset classes that focused on generating high income. Changes to the index included reducing the number of constituents to 60 and establishing what GraniteShares described as a "quantitative screen ... to help minimize index volatility." Let's take a look at HIPS today and see what else may have changed over the past few years.
A Distribution By Any Other Name
As mentioned, HIPS has been around in one form or another since 2015, but something that hasn't changed is the fund's monthly dividend, a solid $0.1075 per share since day one. Based on this distribution and recent share prices, this gives the fund an impressive 12-Month distribution yield of 9.97% and a 30-Day Securities and Exchange Commission yield of 8.61%. The 30-Day SEC Yield measure was instituted to keep fund issuers honest in a sense. Back in the day, mutual funds might have only had quarterly or even annual distributions but could post an annual dividend yield based on those intermittent payments to attract investors. By mandating a 30-day rolling window account of fund income, regulators gave investors a way to accurately gauge the frequency and steadiness of a fund's income stream.
Back in the day, I was the product manager for closed-end funds at Morgan Stanley (MS) , which included Van Kampen funds, as well. One thing we used to wrestle with was setting dividend policy. There is a regulatory requirement for funds to pass through mid-to-high 90% of income to shareholders, but sometimes it turned out that the fund didn't accrue enough income to sustain current distribution levels. If we felt it appropriate, we would then supplement the fund's dividend through a Return of Capital (ROC) event. A ROC is exactly what it sounds like, taking assets from the fund and returning them to shareholders as part of a dividend. Doing this not only helped the fund maintain a distribution level that shareholders had become accustomed to but also was not (and still is not) considered a taxable event.
The Cal Ripken-like consistency of this fund's dividend payments got me thinking about what was driving this distribution. Granite Shares does a great job of providing transparency to shareholders, so I was able to view the distribution history going back a few years. I scraped that data into a spreadsheet and ran some numbers. While there have been periods where ROC accounted for the majority of fund dividends, especially throughout 2019 and the first half of 2022, ROC accounted for 0% of distributions through the back half of 2022 and so far in 2023 accounted for just 9% of the January and 20% of the February dividend payments.
One thing that is worth noting is that much of the decision by HIPS to incorporate ROC in a distribution is out of the Granite Shares' hands. HIPS is a fund of funds product so each of HIPS holdings is making the same kinds of dividend distribution decisions I talked about earlier, decisions that Granite Shares has nothing to do with.
Wrap It Up
To be clear, the ROC discussion wasn't meant to single out HIPS as doing anything bad, or wrong. Often times you will find that high-yielding, unlevered products end up using ROC to prop up distributions from time to time. Where this becomes a problem is if the fund become dependent on this practice long-term, which I don't see here. Overall, I like HIPS, if only because of the diversity of income streams offered including a variety of closed-end funds; real estate investment trusts (REITS); business development companies (BDCs), which can also provide additional diversification; and master limited partnerships (MLPs) for energy exposure. If high levels of unlevered income interest you, then check out HIPS.