Frequently Asked Questions
Can the HIPS ETF send me a check each month directly to my home? Yes, just direct your brokerage firm to send the check. One would expect your check to arrive approximately by the end of the second week of each month.
Can the HIPS distribution be utilized for monthly compounding? Have your brokerage firm institute a DRIP (Dividend Re-investment Plan) Plan whereby your monthly distributions buy more HIPS with each monthly distribution.
Are pass-thru securities mandated by law to distribute virtually all their profits to shareholders? Congress elected to make a broad range of businesses exempt from the federal corporate income tax on the condition that they distribute virtually all of their profits to shareholders, who assume full tax liability for those cash flows. In general, these benefits have been extended to mature business models whose functioning provides a stable platform for other elements of the economy.
What are the benefits of 300 pass-thru companies in an ETF? Diversification, although in and of itself does not ensure a profit or guarantee against loss, it does generally help mitigate the risk and volatility in a portfolio by spreading your portfolio across several asset classes and many different companies that are mandated by law to distribute virtually all of their profits to shareholders.
What is alternative Income? Income from non-traditional sources such as bonds. In the HIPS ETF its income is produced primarily from beneficiaries of the US economy through Master Limited Partnerships (“MLPs”), Real Estate Investment Trusts (“REITs”), Closed End Funds (“CEFs”), Business Development Companies (“BDCs”) and Royalty Trusts (see below definitions).
Is the income in HIPS fixed or can it fluctuate? It is not fixed. HIPS is primarily interested in the return on an investment that comes from cash flow generated internally by the asset, therefore distributions can decrease or increase without notice.
Where can I learn more about pass-thru securities? There are any number of resources available on line, if one were to search for any of the asset classes included in HIPS there would be no shortage of articles, blogs and periodicals to peruse.
How long have pass-thru securities been in existence? Each asset class has its own history. The Investment Company Act of 1940 standardized and modernized the legal and regulatory framework for closed end funds, as well as establishing the legal basis for the now familiar open end mutual fund. Congress passed the Real Estate Investment Trust Act in 1960 for physical real estate pooling which was updated in 1986 with the Tax Reform Act and the 1999 REIT Modernization Act which also allowed ownership of real estate debt securities along with physical properties. MLPs gained prominence with the Tax Reform Act of 1986 and the Revenue Act of 1987. BDCs were established in 1980. Royalty Trusts were recognized in 1979.
How is the income broken out from a tax perspective for HIPS on its 1099? Any ordinary income or short term capital gain dividends the fund pays out would show up as an "ordinary dividend" (Box 1) to shareholders on their 1099-DIV. Any LT capital gain the fund pays out would show up as a "Capital Gain “distribution (Box 2) that the shareholder could treat as a LT capital gain on the tax return. Any ROC distributions would be treated as a "Non-Dividend Distribution (Box 3)" on the 1099-DIV.
Do I have to delay filing my taxes because the ETF is still waiting for K-1s? No. That’s why the fund chose a November year end so that the K-1s would apply to the Fund income in the year they are received (in December). So when the fund gets to their yearend in November they will already have all the K-1s to include in their income for that year.
Is there any advantage or disadvantage for HIPS in retirement accounts such as an IRA? No. Retirement accounts aren't paying taxes until the individuals withdraw their money in the account so there would not be Tax advantages or disadvantages since they wouldn't be paying income at times when the funds are paying out dividends any way.
Can you expand on the Return of Capital (“ROC”) for MLPs in the HIPS ETF? Just because the MLPs commonly pay out ROC does not necessarily mean the ETF will report a ROC to the shareholders. As explained above, a ROC to the shareholders is based upon the overall income and capital gains the fund earns compared to what they pay out in distributions throughout the year.
What is a Royalty Trust? A Royalty trust allows the creation of public ownership of a defined resource body such as energy or minerals while it is produced, with a fraction of its gross revenue going to the owners of the trust. In practice, this allows extraction companies to sell to the public the producing rights to mature resource bodies, which in turn allows them to invest in new finds and new developments.
What is a Closed End Fund? A CEF is the earliest version of a pass-thru security and became popular in the stock market boom of the early twentieth century. Precursors to “modern” open end mutual funds, investment companies or closed end funds had a fixed number of shares and were listed on exchanges like common stocks. CEFs hold securities of various types, often including exotic or illiquid items along with more traditional stocks and bonds. These primarily yield oriented vehicles can be managed without fear of redemption allowing the manager to invest for the long term.
What is a Real Estate Investment Trust? A REIT is a pooled investment and public listing of ownership in physical real estate such as apartment buildings, malls, warehouses, etc. A REIT can also have ownership of real estate debt related securities that are primarily mortgages.
What is a Business Development Company? BDCs provide financial support for middle market companies in forms which are often lower risk than venture capital equity investment, but riskier and more innovative than traditional commercial lending. In our experience they also tend to be shrewd investors when industries get in a distressed circumstance and can often be a capital supplier of last resort.
What is a Master Limited Partnership? MLPs streamline and regularize the public ownership primarily of energy infrastructure, although this form of ownership has been applied to a number of other types of mature business entities such as asset managers and amusement parks.