The GraniteShares HIPS US High Income ETF (HIPS) combines four distinct high-yielding asset classes—Closed-End Funds (CEFs), Business Development Companies (BDCs), mortgage Real Estate Investment Trusts (mREITs), and Master Limited Partnerships (MLPs). The fundamental question for investors is whether this diversified approach truly enhances value compared to a straightforward, equally-weighted portfolio of these asset types. A comprehensive evaluation reveals several concerns regarding its long-term viability and attractiveness as an investment vehicle.
Since March 2023, HIPS has consistently underperformed a basic equal-weight benchmark of the four underlying asset categories by more than 2% annually. This underperformance, coupled with a high proportion of distributions categorized as return of capital, casts a shadow over the sustainability of its high yield. Despite a stable monthly payout and recent sideways price movement, the continuous erosion of assets suggests that future distributions may face increasing pressure. Furthermore, its low assets under management (AUM) and limited liquidity make it a less appealing option compared to creating a personalized blend of pass-through category ETFs or exploring more active bond alternatives.
Underperformance and Asset Erosion Concerns
GraniteShares HIPS US High Income ETF has demonstrated a pattern of underperformance when compared to a simple, equally-weighted portfolio of its constituent asset classes: CEFs, BDCs, mREITs, and MLPs. Since March 2023, HIPS has trailed this benchmark by over 2% annually, indicating that the actively managed blend has not yielded the anticipated benefits. This persistent underperformance is a critical factor for investors seeking optimal returns from high-income strategies. Although the ETF has managed to maintain stable monthly payouts and its share price has remained relatively flat, the underlying issue of asset erosion raises significant concerns about the long-term sustainability of these distributions.
A notable aspect of HIPS's distribution profile is that a substantial portion—over 50%—is classified as return of capital. This means that instead of solely distributing earnings, the ETF is effectively returning a part of the investors' initial principal. While this might temporarily boost the yield, it signals a gradual depletion of the fund's asset base. Such a structure implies that, without a significant turnaround in underlying asset performance, the high yield is not truly generated from operational profits but rather from the systematic reduction of the fund's capital. This situation creates a precarious scenario where the perceived high income might mask an underlying decay in the fund's intrinsic value, making it less attractive for investors focused on capital preservation and genuine income generation.
Structural Risks and Investment Alternatives
Beyond its underperformance and asset erosion, GraniteShares HIPS US High Income ETF is burdened by several structural weaknesses that diminish its appeal. The fund's low assets under management (AUM) contribute to weak liquidity, making it difficult for investors to enter or exit positions without impacting market prices. This lack of robust liquidity is a significant drawback for an ETF designed to provide high income, as investors often prioritize ease of transaction and market efficiency. The combination of low AUM and weak liquidity amplifies the risks associated with holding HIPS, particularly during periods of market volatility or stress.
Given these challenges, investors might find more compelling alternatives by constructing a customized portfolio of individual pass-through category ETFs. This approach allows for greater control over asset allocation, risk exposure, and expense ratios, potentially leading to better-tailored income strategies. Moreover, actively managed bond funds or other fixed-income instruments could offer more reliable and transparent income streams without the inherent complexities and risks associated with HIPS's blended structure and high return of capital. Exploring these alternatives can help investors achieve their income goals while mitigating the structural risks and underperformance observed in HIPS, ultimately leading to a more robust and sustainable investment portfolio.
