Lead-Lag Live

Will Rhind on High Income Pass-Through Securities, Yield Boost Strategies, and Strategic Portfolio Diversification

• Michael A. Gayed, CFA

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Prepare to transform your income strategy as we explore the world of High Income Pass-Through Securities (HIPS) with our expert guest, Will. Discover how these unique investment vehicles can serve as robust alternatives during high inflation by tapping into the power of REITs, MLPs, closed-end funds, and business development companies. These securities not only offer the potential for higher income levels than traditional fixed-income sources but also come with significant tax advantages. Join us as we uncover the strategic design behind HIPS and their resilience during tumultuous times, including the 2020 COVID-19 pandemic, all while emphasizing the critical role of diversification.

We spotlight the remarkable stability of the HIPS income portfolio during market upheavals, highlighting its ability to maintain consistent income distributions when the going gets tough. You'll gain insights into the tax efficiency of HIPS and explore the nature of return on capital, debunking common misconceptions about pass-through securities' expense ratios. Together, we'll navigate the intricate relationship between inflation, wage stagnation, and the rising demand for yield-generating investment products, offering a comprehensive understanding of why HIPS stand out as a compelling option in uncertain economic climates.

Additionally, venture into the innovative Yield Boost strategy, an options-selling approach that combines high yield generation with downside protection through selling out-of-the-money put options. We'll use Tesla as a case study to demonstrate how Yield Boost achieves impressive returns while minimizing NAV erosion. By comparing this strategy with HIPS, we reveal how both methods can cater to those seeking consistent income and total return in their investment portfolios. Tune in for a deep dive into crafting a well-rounded portfolio that meets fixed liabilities while offering income certainty and robust total returns.


DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of GraniteShares and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

My name is Michael Guyad. I am hosting this webinar from GrantShares on the HIPS ETF. We'll be talking about pass-through securities, high income in high inflation, and Will is incredibly knowledgeable, so I think all of you are going to enjoy what he has to present here. So Will all yours, my friend.

Speaker 2:

Thank you and obviously, thank you most importantly to everybody who is tuning into this webinar today. So we want to talk about HIPPS. Like we said, the ticker code stands for High Income Pass-Through Securities, but, as the name suggests, we're going to be talking about pass-through securities, what they are, what they do and what kind of role a fund like this can play in your portfolio. So, without further ado, let me try and share my screen here and we can get going All right. So, for those of you that are not familiar, a little bit about GraniteShares, the company. So we're an ETF issuer based in New York, global business with ETF strategies here in the United States, in European markets and with the presence in Asia as well, markets and with the presence in Asia as well, huge amounts of different strategies, ranging from physical gold to leveraged single stocks and everything in between. So, in terms of the offering that we have, here's a lineup of our non-leveraged ETFs here in the US. We're obviously going to be talking about HIPs, subject of this presentation but we have gold, broad commodities and income and equity strategies. Some of you might know us for the leveraged single stock business, where we're the market leader in that business A huge range of different products and different strategies. Here is the list, but obviously you can find more on our website, grandchairscom.

Speaker 2:

So let's get into today's presentation and what I'm going to do is go through this particular slide. So I've talked to these points first, and then Michael and I are going to have a bit of a discussion around the current environment and yield and income more broadly and how you can use those in your portfolio. So, as we all know, that fixed income, or income more broadly, has been on a bit of a rollercoaster ride from a massive bull market up until 2021, effectively when the Fed started raising interest rates, and those people that have been invested in fixed income over the last few years have noted that it's been a very difficult market for returns in that particular asset class, which has led to a lot of people to start thinking about still how to generate income, but do that from a source which is not your traditional fixed income. And indeed, when we had the luxury of a bull market in fixed income, what we heard a lot of the time and income more broadly, I should say is that people were less concerned about outright generating income because they could generate a return through either releasing a long-term capital gain, for example, in addition to just harvesting income from a strategy. So people would say, well, why do I need to generate income? Specifically because my portfolio is going up, and if I need to release some income or release some capital from that, I could just sell and generate my distribution, and that, of course, was fine while the market was going up. But of course, what we have seen continuously is the Achilles heel with strategies such as that is inevitably you become a seller at exactly the wrong time. So, in other words, when the market crashes or the market's selling off, you need to generate income and therefore have to sell when the market is at depressed levels, like we saw, for example, in COVID. So what are we talking about today?

Speaker 2:

Some people like to refer to this as alternative income, and the reason for that is just simply because the income stream that's generated from these pass-through securities is not coming from your traditional equity dividend paying stocks or bonds. Whether you refer to it as alternative income, whether you refer to it as pass-through securities or just an income or yield strategy, doesn't really matter. But for this particular purpose in this presentation, we'll call it alternative income, pass-through securities. The one thing they have in common is. This is like an interesting class of security Some of you will be familiar with almost certainly with one sector at the very least, but some of you will no doubt know this sector quite well. But it's a section of the market which the one thing that ties them all together is they don't pay corporation taxes. So these are pass-through entities required by law to pass through almost all of the income that they generate directly through to shareholders.

Speaker 2:

And these particular securities are concentrated in sectors such as MLPs or master limited partnerships typically oil and gas infrastructure, pipelines, et cetera. Bdcs or business development companies, which function a little bit like quasi-private equity type vehicles that are typically lenders and finances to small, medium-sized businesses. Then you have REITs, which most people know. Real estate investment trusts can be focused on the mortgage REIT side to the equity REIT side, so owning physical property. And then, lastly, closed-end funds, so any closed-end structure which is investing in underlying income strategies.

Speaker 2:

These are all examples of pass-through securities. These are all examples of pass-through securities and, like I said, the main sort of benefit to pass-through security, where you don't have that sort of so-called blocking entity in between and therefore you're starting off, with all things being equal a higher level of income because it's not being subjected to corporate tax rates before you get it. So that's one big attraction, clearly, of pass-through securities and that's why we're using it for HIPS. And, like I said, we concentrate in this particular strategy on the four main sectors of the pass-through security world, namely REITs, mlps, closed-end funds and business development companies. And again, all of these they don't pay corporation tax and they're required by law to distribute almost all of the income that they generate this portfolio.

Speaker 2:

While these are the sectors, this is an equally weighted strategy and we are referencing or tracking an underlying index which is selecting those pass-through securities based upon yield and volatility screens. In other words, we're trying to find securities that exhibit a high yield but also low volatility, so it's that minimum volatility tilt towards high yield, so you're not just getting maybe a high yield or a high dividend payer, but something that's incredibly volatile at the same time. So if you take away maybe one slide from this, this is probably the slide to take away, and what we've tried to do here is produce an illustration of HIPS as what we refer to as really an all-weather income portfolio. So the portfolio is designed to distribute the same amount per cash amount per month, regardless of market cycle. And if you think about the market cycle in the context of inflation or the context of growth, in this particular chart here it's referencing, you can see in each quadrant the particular parts of the HIPs portfolio that are likely to perform in these different environments. So whether we have a high growth environment or a low growth environment, or a high inflation environment and a low growth inflation environment and a mixture of the two, you can see that, for example, on the top right, if we have a high growth environment but we have also a high inflation environment, that's likely to benefit hard assets. So MLPs, upstream MLPs, equity REITs, which own physical buildings, as opposed to say something like a low growth environment with low inflation, where you have the bond-like investments, closed-end funds that are focused more on the fixed income world, or mortgage REITs, which obviously are holding mortgages. So this illustration here is designed to really show you graphically what we're trying to do, which is build that all-weather income portfolio that can distribute that same amount every month regardless of the market cycle.

Speaker 2:

So, as I kind of hinted on a little bit before, the portfolio construction process, four hips is set out in this particular slide. So think of it as an inverted triangle, where at the top of that inverted triangle, or that funnel, if you will, you start with the four main sectors within the pass-through world and that's give or take $2 trillion worth of market cap $900 plus pass-through securities and you filter that by volatility and yield, which is the second drop down here in the funnel. So number two screen for the 10 highest yielding and least volatile names in each sector. So then that becomes a 40 stock or a 40 security portfolio. Then equally weight those between those particular sectors, so you have closed-end funds, mlps, reits and BDCs, and then, of course, that is your strategy, your HIPS strategy, and the purpose of this is to, on the left, minimize volatility in the strategy at both not just the security selection level but the asset allocation level as well, and that allows the strategy to therefore pay that consistent monthly distribution which so many people value. So this is how the portfolio is put together. Again, to summarize, it's an equally weighted portfolio that gives exposure to MLPs, reits, closed-end funds and BDCs, and the screening factors are yield, of course, because it's an income portfolio, but also volatility, where we're trying to get securities that have a minimum or or lower level of volatility and, as you can see here as an example with the portfolio, the sector breakdown here on the table in the left you have the equally weighted sort of representation here in terms of sectors and then on the right you have the top 10 holdings in the portfolio, a mixture, obviously, of the different pass-through securities. So, looking back, the great thing about HIPS is the HIPS strategy actually goes back now 10 years, so it has a 10-year track record, over 100 million in assets, and in that 10 years the strategy has been through a lot of ups and downs in terms of market either outright recessions or corrections, as well as bull markets, and in that time the portfolio has continued to deliver as designed.

Speaker 2:

I want to particularly highlight in this particular slide here, the drop that the strategy suffered in 2020. And the reason for calling this out is because I want to highlight the sort of absolute worst case scenario for an income portfolio such as this. The worst case scenario for an income portfolio such as this and, of course, back in COVID we had a situation where the physical economy was pretty much shut down entirety, and so when you have an income portfolio, a lot of your stocks in that portfolio perhaps would have their ability to pay compromised by this particular situation and, as we saw, that was certainly the worst scenario I've ever seen in my career in terms of funds in the income space or stocks that were in the dividend space, cutting dividends or eliminating dividends altogether. And what was really interesting was that we went through 2020 with a portfolio with only one holding that we had, which was a hotel REIT. That was the only security that we owned that stopped paying. And again, the benefit, or the great benefit of diversification is that, even if you have one or in this case, it could be more than one but we just had one security that stopped paying, it did not affect the strategy's ability to pay, and that's why we went through 2020 still paying that 10.75 cents per share per month. So, even though the NAV dropped in 2020, because, of course, the market cratered people still were getting their $0.1075 per share per month. Even in that, you know what I would call the worst case scenario for income paying stocks and funds. The NAV obviously has subsequently recovered, like everything else at that time, but it just goes to show that for a portfolio like HIPS, which is really centered around this idea of paying consistent monthly income, that if you design that portfolio for an all-weather environment, even if you have a scenario like 2020, you're able to look past that and come across better times. And, like I said, now we have 10 years worth of track record in this strategy. So, going back 10 years, every single month, paying that $0.1075 per share never missed a distribution. That 10.75 cents per share never missed a distribution.

Speaker 2:

This particular chart here shows that, in addition to the 10.75 cents per share, that annualized yield, which is just over 10% in terms of annual yield, that actually a portion of that income is return of capital. And this particular table might be quite difficult to read some of you, depending on what kind of screen that you're using, but you can see that you have your income per share and then, on any given year, there's a return of capital per share, which can be, in some years, pretty significant. I think the highest year looks like 2017, where it was 67%. And, just to be clear, the return of capital in the context of HIPS comes from the investments in MLPs mainly, but it comes from investment income generated from the underlying securities themselves. It's not from the fund selling assets and therefore producing a return of capital, it's purely from the income streams that are generated from the underlying securities, which, in the case of a lot of MLPs, are themselves a return of capital. So, from an after-tax or from a tax perspective, when you get that income it's not subject all of it's subject to income tax. You do have a return on capital for some of that, which of course helps your after-tax gain in a strategy like HIPS.

Speaker 2:

Another big thing that is worth spending a bit of time on with a strategy like HIPS is there's one unusual thing with pass-through securities that doesn't exist in the rest of the market for the most part, and that is that certain pass-through securities, namely business development companies, charge what's called acquired fund fees and expenses, or AFFE, and that's very unique to principally. It's the way that business development companies, or BDCs, are taxed. So BDCs are taxed as registered investment companies, taxed as registered investment companies, much like a mutual fund, and not a corporation. So when you buy a corporation, you buy a share of a corporation in the market. Of course, any expenses, everything that is involved in the operation of that corporation, is just included in the stock price. So you don't think about the expenses that that company has, you just look at the stock price and you buy the stock. With a BDC, it's much like a mutual fund, where you're buying the shares of that particular mutual fund but you'll see line items of expenses disclosed, and that's, again a very unique thing to the way that BDCs are taxed.

Speaker 2:

So when you look at the expense ratio for HIPS, you can see that the management fee for HIPS is 70 basis points, but you have an additional amount of fees that give a total expense ratio of 1.99%. So the important thing to note here is that, like I said, almost just over 1% is coming from BDCs and those are not direct costs. So in other words, they do not come from the assets of the fund. The fund is not selling assets to pay for these fees. The only fees that come from the fund are the management fees, which come from the assets of the fund. So when you look at the tracking error, for example, of HIPS, you'll see that the tracking error against the index is around 70 basis points, ie the management fee, not 2% or 1.99%, which some people infer from the total expense ratio that they're paying 2%. They're not. Another example that I typically use is there's a BDC ETF that's actually operated by a competitor of ours, but the ticker code is B-I-Z-D and if you look at that fund that's just BDCs and there they have an expense ratio of around 10%, which again is not accurately reflecting what investors pay to hold the strategy, particularly on the acquired fund fees expenses. But suffice to say these fees are not in addition to the management fee, they're already included in the stock price of the underlying securities.

Speaker 2:

All right, so in terms of thinking about how to use something like HIPS, I think the thing that we see probably most is people using HIPS as a complement to existing fixed income strategies. And because bond portfolios are exposed to interest rate risk and credit risk interest rate risk and credit risk that when you blend with an alternative solution such as HIPS, it can help to lower the exposure to those kinds of risks. So combining alternative income, something like HIPS, with traditional bond portfolios can help to lower the overall portfolio risk while improving the yield and therefore the total return. This particular chart here is aimed to really provide an example of how you can think about HIPs in the context of other strategies and asset classes that provide income. So when you look at the right-hand side here, these different bars in the three buckets, so you have equity on the left-hand side and the bucket here with equities is represented by the S&P 500. So you'll see the yield on there or the distribution there at 1.2%. You'll see a high dividend basket there right beside it where you have a 2.7%. Then you have bonds high yield bonds beside that and then the different sort of sectors within the alternative income space or the pass-through space, and so by blending those together you get a level of yield that is higher than some of the traditional sources, such as high yield and high dividends. But actually what's also interesting is if you look at the volatility of hits, but by blending those together the volatility is around the same as a high dividend portfolio. In other words, the volatility is about the same but the level of income or level of yield you're getting is much higher than in the equity dividend space. So just an interesting example of how you can put those together and by blending those pass-through securities together you get that level of income but diversification as well.

Speaker 2:

In this particular chart we show some correlation studies relative to most popular kind of benchmarks in the markets. So, starting with the S&P 500 here on the left, and then you've got the ag in the middle, then the 10-year government bond on the right, and so the correlation represented here by the R-squared number. So the higher the R-squared number, the more correlation that exists. So, as you can see, a strategy like HIPS is going to be more correlated to equities than it is to fixed income. So the R-squared number higher against the S&P 500 than against the Bloomberg Ag and against, say, the 10-year government bond. So it's going to be more equity-like, but again, it's not an equity strategy or a fixed income strategy.

Speaker 2:

And so here's an example of how you could integrate HIPS into, say, a government bond portfolio. In this case it's an 80% government bond portfolio with a 20% holding in HIPS, with a 20% holding in hits, and so in this case you can see that the total return would improve as well as the yield. So that compliment I was talking about that here's a way, because it's a high yielding portfolio but it has more equity-like characteristics than fixed income characteristics. Again, it can be shown that by complementing with fixed income it can help boost the yield, which is really important, but also the total return. And it's again same thing in terms of making an allocation. In this case it's to the ag. So the aggregate bond, us aggregate bond portfolio. Again here, just a 10% allocation to an ag portfolio generates the same thing a higher amount of yield, but also a higher amount of total return as well, and the yield volatility only sort of slightly increases. So not really like a material difference in terms of volatility, but improves the level of yield, improves the level of total return.

Speaker 2:

So to summarize here, some of the advantages of a strategy like HIPS is that it's not correlated to conventional fixed income. So, as we have shown from the R-squared numbers against bonds and the 10-year yield, that something like HIPs doesn't have a statistically significant correlation and therefore that's valuable in terms of diversification when you're seeking to bring in additional sources of yield and or return to a portfolio. Historical consistent distributions again one of the longest track records in the market, representing 10.75 cents per share per month worth of distribution, never faulted on a distribution, irrespective of the market environment or the cycle that we're in. Diversification, so an equally weighted strategy across the four main sectors of the pass-through world. You're not trying to pick the best sector, you're not trying to pick the worst sector. You're trying to give or deliver steady income or yield performance across those sectors over time.

Speaker 2:

Provides inflation hedging through its exposure to both well high yield so high hard asset type exposures in the portfolio and risk optimized risk through security selection and asset allocation, so being diversified not just across the security level but across the asset allocation level as well. And one of the key screens for HIPs is volatility trying to minimize the higher volatility that can sometimes come with higher yield strategies. So you have the potential here for higher returns and yield without increasing overall portfolio risk. It's an ETF wrapper of 100 million in assets, so plenty big enough to size good trading volume every day, so a liquid fund to go in and out. We see a lot of people starting to substitute things like this for private credit type strategies, whereby people have really been burnt with lockups in some of these strategies and have started to value the liquidity that comes with ETFs more broadly, but certainly high income generating ETFs like HIPS.

Speaker 2:

The distributions have been historically tax advantaged because of the return on capital component and you have not just the rules-based approach. In other words, it's a passive strategy, it's not active, but you have the potential for capital appreciation as well within the strategy. So here you go. You've got these different selling points for HIPS. We've gone over a majority of those. But I think again, if you're looking for something that has a consistent track record, that is a complement to the portfolio, a 10% yielding product roughly in the portfolio, then this is something I think that's worth consideration. Maybe just to wrap up, of course, just after we'll talk about this at the end, but if you want to learn more about HIPS, clearly please reach out directly to us. You can contact us via the website granitechairscom. We have a chat function. Of course, you can call us. We're on social media as well, on the relevant social channels X, linkedin, et cetera. So please do reach out if you want to learn more about this or about anything that we do frankly.

Speaker 1:

So the thing that's fascinating to me about this cycle is the sheer amount of demand out there for any products that have very high yield. Right, I mean, you can see it. You alluded to them. Private credit side people have been burned, but they forget that they've been burned until the fire is going right. We've seen a proliferation of a lot of these different strategies with high yield outside of the fixed income side. Hips has been doing this for a while. Right, I mean, that makes it low and a pretty big differentiator.

Speaker 2:

Why do you think I'm just going to start maybe a good place to start there, but why do you think there is such a demand for income strategies?

Speaker 1:

So I think it's fascinating, right? Because, as much as everyone knows that inflation was a part of the wages, were a part of the inflation rise. Wages have been stagnating and inflation is still rising. So it's one of those things where I think people have come to the realization that they cannot keep up with inflation from their jobs alone, and I do think that there is a convenience factor to investing in products that give you that yield on a regular basis. So look, we all know, from a total return perspective, all you need to do is just sell a portion of your existing investment and that's the equivalent of a yield. It's just you got to actually put the sell order in. A lot of people don't want to have to go through that hassle.

Speaker 2:

And it introduces market timing, which, of course, invariably is difficult to get right. I think my take on this quickly and this is maybe one of the great ironies of investing is that the demand for yield now is so meant that financing costs for everybody in all different parts of their life have gone up. So ironically, in a zero interest rate environment, people did have the luxury of perhaps generating capital gains selling whatever asset it was to generate that yield, but on the flip side of it, their need for income was diminished or was a lot less, because the financing costs were a lot less, and particularly you mentioned just to riff off of the private credit thing that again, what changed massively is that when interest rates went up, people's financing costs went up. Mortgages went up, auto loans, credit cards, anything that was requiring financing went up, and so people were trying to bring forward, for example, putting money into a private credit fund, whatever probably seemed like a reasonable thing to do when you didn't really have a huge amount of need for monthly income. And then, once the financing environment completely changed, people said oh now my monthly income have gone from X to Y, I need more income and we're not able to get out of these funds, just as one particular example. We're not able to get out of these funds, just as one particular example.

Speaker 2:

But I think the irony of all of this is that, while you can generate more income in an interest rate environment where you have positive real interest rates, the demand for income is also so much higher and therefore we've seen this explosion in demand for income strategies, which we have with HIPS and then we have with the options, income products with YieldBoost, and that's really the main philosophy around it is, people are looking.

Speaker 2:

I think the other thing we were missed to point out is that people have been burnt with bonds and a lot of people now are looking to diversify. I'm not gonna say that people are completely shunning bond, because that would be wrong, but I think people are looking to diversify the way that they get exposure to income and again, maybe in the previous rate environment, a 60-40 portfolio where you had 40% exposure to bond was something that was sort of common throughout the market, indeed, maybe even the market standard for a lot of cookie cutter advisor portfolios. I think now we see that changing a lot in terms of the 40% and people are cutting down the fixed income exposure and replacing that with alternative sources.

Speaker 1:

Do you get a sense that a lot of the investment community just doesn't understand what a pass through security fundamentally is, that a lot of the investment community just doesn't understand what a pass-through security fundamentally is? I mean, I think people understand option selling as generating income and yield. I don't think they understand just the category in general.

Speaker 2:

Yeah, I mean, it's definitely less popular, less known. That's why Hips is not a $10 billion fund, like it probably could or might be.

Speaker 1:

Would you find people watching this webinar? We can get there.

Speaker 2:

Exactly Because it is niche. I mean pass-through securities is a niche area of the market. Most people, like I said in my kind of presentation, most people probably heard of one of the sectors, maybe all of them. But typically what we find is you have somebody that if they're in pass-through securities at all, they maybe buy one particular sector, they maybe buy some MLPs or they buy BDCs or they buy REITs, but typically we find it's very unusual for people to do all of them. And certainly the unique thing about HIPS is it's the only ETF that I'm aware of that blends all of those together in a diversified offering. But pass-through securities are definitely niche. This is not.

Speaker 2:

Again, these are not dividend-paying stocks, not bonds. Those are the two most common ways or parts of the market where people get exposure to income. And indeed with BDCs, because of the particular situation I mentioned with the acquired fund fees and expenses, bdcs are even excluded from a lot of the main benchmark indices precisely for that reason, because it would sort of blow up people's expense ratios when they were constructing ETFs or other products from that. So people index providers and fund providers tend to exclude BDCs purely on the basis of you can't then have a 20, 30, 40, 50 basis point product. If you have BDCs in it, it becomes a 1% plus.

Speaker 1:

I'm going to show a chart and Patrice made a comment which relates to the chart, saying it's strange that it's correlated with equities, as most of the return is from past income, which is designed to be more steady also, aka fixed income. One of the more interesting things about HIFs in general, I argue, is it is true as soon as I can show you the screen that there's really no erosion on NAV. So if you look at the last two years, despite that high yield, it's been a remarkable steady uptrend, despite that payout.

Speaker 2:

Yeah, so the way to think about that that probably is with dividends reinvested.

Speaker 1:

This would be total return. Right, that's right, yeah, total return.

Speaker 2:

So if you take the distributions out of it it will look more flat, which is exactly what it's designed to do. So it's designed to produce consistent monthly income. That is the design $0.10 cents per share. So what's interesting about that is, of course, it allows you to lock in to that yield because the distribution is fixed.

Speaker 2:

So it's not like the majority of yield products where someone will say, oh, the yield is 10% or the yield is 5%. Well, it might be for that day, but it won't be the same tomorrow or six months time or next month. And that's because the amount of yield, the distribution, is variable and the share price is variable, whereas with HIPS, because that distribution is fixed in cash terms and dollar terms, that when you buy, that is the yield that you're going to get, because your basis is set on the day that you buy it and obviously that yield, that distribution, becomes a factor of your basis. So it is unique in that sense. But yeah, I mean it's going to be more correlated with equities, because things like REITs, mlps, bdcs, there are publicly listed securities. So more equity-like it's just not. Again, the value here in my mind is that it's not correlated to traditional fixed income. Raoul PAL.

Speaker 1:

MD, phd. You mentioned yield boosts and the new fund family on that end and I use that term, nav erosion purposely we should talk about that fund family and how that can be paired against HIPs.

Speaker 2:

Yeah. So of course your NAV erosion is typically the reason why there's no free lunch in the high yield world. So when you come to strategies that generate a high yield, typically the trade-off is that your principal is being eroded in that particular investment strategy. So what Michael's referring to is a strategy and a fund family that we're bringing out called Yield Boost. Yield Boost is an options selling strategy, so it's an income or a yield strategy generated by selling options. In our case, we sell put options, and when you do that you generate or can generate, depending on the options a high level of yield.

Speaker 2:

But if you're selling options at the money, which is the vast majority of what covered call strategies in the market do, then you're exposing yourself almost 100% to the downside.

Speaker 2:

So, yes, you generate yield, but if the underlying goes down, then you go down too. So when you look at the total return of those strategies, typically the total return can be quite poor. What YieldBoost does differently is when we sell the options. We sell out of the money options, and out of the money just means that there's less chance of the option being exercised than when you sell at the money options, and out of the money just means that there's less chance of the option being exercised than when you sell at the money. So when you sell out the money then you have less chance of it being exercised and therefore you have some downside protection. And the downside protection in the context of NAV erosion means you're less likely to have NAV erosion or the NAV erosion, if it does occur, is less severe than in a covered call strategy. So that's the whole principle. Yield boost is about generating a high level of yield on the one hand, but also trying to protect downside in a way that doesn't exist with covered call strategies.

Speaker 1:

So the first one on that is focused on Tesla Right.

Speaker 2:

That's right. Yeah, tsyy is a ticker, so underlying is levered ETFs on Tesla, so generate a high level of implied volatility, therefore a high level of yield, and with that you can sell options out of the money and still generate that high yield, but give some downside protection as well.

Speaker 1:

So I'm showing on the screen. It's been a relatively short history but actually pretty interesting so far because there's been a lot of movement in Tesla in particular. If you look at TSYY since inception, which is towards the end of December of last year, it's up 9.65%, whereas Tesla itself is down 16.87% and the annualized distribution was what? 35% on that.

Speaker 2:

Yeah, that's right. Yeah, 35%, so it's still huge.

Speaker 1:

So you and I were talking about this while walking in the city. I myself think it's a fascinating solve potentially for the NAV erosion issue, while providing what people want, which is that high yield on single stocks. If we think about HIPS as kind of a core alternative, is it fair to say that yield boost would be sort of satellite to that core?

Speaker 2:

I think certainly the individual stock side would be. So, for example, on Tesla, that is very much a satellite as opposed to a broad basket. So clearly, when you have a yield boost on Tesla, the underlying is derived from Tesla stock itself, so it's much more concentrated. If you take something like HIPS, HIPS is a diversified portfolio. That's a core holding. Again, it's like any ETF. It probably shouldn't be your only holding but a complement to existing ETFs that you own on either generate income in the fixed income space or in the equity dividend paying space. So it's a complement. By blending different sources of income together, you can typically achieve a high level of income but lower the volatility or at the very least maintain a similar level of volatility. So definitely more of a complement. But yeah, Hips is a diversified portfolio. We will launch other yield boost products in the yield boost family that will be based on diversified indices, which again will be much more core or indeed be able to assume much more of a core role in a portfolio.

Speaker 1:

RAOUL PAL. I see there's a number of advisors on the webinar and the challenge for every advisor is always how do you communicate much more of a core role in a portfolio? I see this number of advisors on the webinar and the challenge for every advisor is always how do you communicate Any strategy that has yield? And we all know that end investors tend to just see the yield number and that's it. Make the case for why yield boost as well as HIPS. You have to go beyond just the yield numbers. Make the case that it's ultimately about the principle as well.

Speaker 2:

Yeah. So I think, at the end of the day, total return is really important. But the reason why we were so attracted to something like HIPs in the first place was we felt like there were very few places in the market where you're able to set the yield that you generate and deliver that on a monthly basis. So, because of that fixed cash distribution, you're able to do that. So let's, for argument's sake, say Hips pays the yield as 10% per annum. Well, if you know that you're going to get 10% per annum, that could be a hugely valuable thing for the portfolio because it enables you to set that against fixed liabilities that you have Could be a mortgage, could be car payments, whatever it could be. But that's a very valuable thing if you know that you're going to be getting 10% per annum, and that's very different to a yield strategy. That could be 10% today, but it could be 7% in three months' time or it could be 13%. So there's really something to be said for the certainty of that income and that's really what HIPPS does. So the idea was this is clearly for people that need income. It is an income strategy and prioritize that income. So the reason why, again, I bring up the 2020 is that you're going to have volatility in the underlying portfolio, because the underlying portfolio are based on publicly traded securities. But if you're able to look past that volatility and say you know what, I'm okay, just clipping my coupon, my monthly distribution, and, yes, I know that the value of the portfolio is going to go up and down, but my liabilities are X or Y or I need to generate X amount of income per month. That's incredibly valuable. And the yield boost is a similar concept, albeit we don't have a fixed monthly distribution. So yield boost is the yield is going to be based upon the implied volatility of the options that we sell at that particular time and again as a function of the share price. So the yield will go up and down depending on those variables.

Speaker 2:

But again, there's value to having that distribution and in a way, you can think of something like HIPs, a little bit like an annuity, whereby what's the value proposition with an annuity? And you talk about NAV erosion? With annuity, you get 100% NAV erosion day one. You give up your principal day one for income payments or a stream of income payments over time and therefore you give up that principal to the insurance company and you're placing full faith and credit in that insurance company and their ability to pay you over time. So with HIPS the proposition is akin to that, albeit you're not giving up your principal. You're getting those payments on a monthly basis, the fixed monthly payments, but at the end of it you still have something, you still have a portfolio, you still have value, as opposed to giving up that principal.

Speaker 2:

And I think that the more that people start to think about and again we're in the right environment for it now, albeit somewhat ironically, given that people are able to earn 4% or 5% or whatever sitting in a money market fund. But because the financial conditions have tightened, because everybody knows that the mortgage rates that they're paying, the auto loans they're paying, whatever it is, it's gone up massively. Everyone's costs, inflation's gone up. People need more income now and that's only possible if you're able to generate that in the portfolio through the right instruments.

Speaker 1:

Yeah, I mean, I think from a communication perspective for advisors it's nice to be able to say we know what we're going to get yield-wise right. Like that there's a consistency, there's a little bit of a sleep well at night type of dynamic. You don't have to guess, right. I mean that's a big value add.

Speaker 2:

Yeah, and remember that in a way is the whole one of the major so-called value propositions with private credit in that, by going private, you give up the mark to market, you give up the transparency of the mark to market, the intraday, the daily mark-to-market that you get with ETFs. And so people say, yeah, well, I'm getting a good yield, but I have no idea what my portfolio is worth. And with ETFs, that's it. You get the transparency, you get the liquidity, you can go in and out whenever you want. But a lot of people are realizing on the private credit side that, yeah, you may get a nice yield, but just because the value of the portfolio is hidden from you doesn't mean it's not volatile.

Speaker 1:

That is a point that drives me crazy, that people don't get that. You know it's like if something's not marked to market, it's probably far more volatile than something that is marked to market.

Speaker 2:

Yeah, well, at least you've got the transparency.

Speaker 1:

Yeah, exactly right, exactly right. Um again, folks, for those that are uh here on this webinar, if you want to get ce credits, I will be emailing you probably the next hour or two with your information, to get your information, to submit that to the cfp board. Um, send us feedback too. I mean, we want to try to get uh as much of this stuff uh improved over time as we do. These webinars, you know, is anything that we haven't hit on that we should, in terms of the macro environment, favoring, not favoring, strategies like kips and strategies like yield boost it's probably two or three hours of things we haven't talked about that's what we do with the high conviction podcast.

Speaker 2:

That's why we do that well I do want to mention something because I was thinking about it. So we did very recently yesterday In fact we did a podcast with David Rosenberg and obviously on that particular day we had the CPI print that came in hotter than market expected and market sold off. And actually David in his take was, if I could paraphrase, saying well, look, the one print doesn't make a trend. And actually this is very similar to what happened last year in early 2024, where again there was an inflation print that came in hotter than the market expected that ended up recalibrating the entire market expectations around interest rate cuts for that year and there are a lot of anomalies in the CPI number at the beginning of the year. And I mentioned that because, of course, today you have another inflation reading that comes in more positive and the market's up again.

Speaker 2:

So it's another example of those short-termisms that you see in this particular market where I think we're so sensitive to these data points, because we're trading at highs in the market in a lot of asset classes, as people know, and so we're kind of hypersensitive to that data in a lot of asset classes, as people know, and so we're kind of hypersensitive to that data. But again, take a step back. Think about the data in the context of what happened last year and again, despite the fact that the numbers came in a bit hotter perhaps it's just an anomaly that was akin to last year- One of the things I appreciate about you and Granite Shares in general is that I know you still consider yourself a small company, but at $10 billion, I don't consider you a small company.

Speaker 1:

But I mentioned that because, for those that are listening, one thing I'm very much impressed by and I'm saying this not because of the relationship I have with Will you guys are very accessible If people want to call in or do the online chat or ask questions. Talk to Matt Lamb, talk to you I mean, there's a face to these than just, rather than just, have some kind of Well, look, that's.

Speaker 2:

that's hugely important, and I think that you know when you're a you know, quote unquote small company, you know what are the ways you differentiate. How would you differentiate yourself from a big company? One of the ways you differentiate is on your focus on the customer and being accessible, being more visible, being more nimble, the things like that that we can do that bigger competitors can't do. And take not to go off on a tangent, but take what's happening with Doge and the US government at the moment this idea that that's perhaps a good example of something that's completely inaccessible, as anybody's tried to get a service from government, whatever it may be. And so when you're a small company, you clearly have the advantage of being able to be more accessible in a way that big organizations, big corporations, can never be, or at least find extremely difficult to be.

Speaker 1:

So it's one of our advantages and we have to make most of it. Where can people get more access or information to HIPS outside of this webinar?

Speaker 2:

GraniteSharescom is really the place that all of the fund documentation lives. It's like the library for all the key documents relating to any fund that we have. So granitesharescom, and of course, within granitesharescom, there are ways for people to communicate with us, be it directly on chat, phone et cetera, whatever you feel comfortable with. And then, outside the website, we have our sub stack, so Granite Shares sub stack, where we publish our content. That's free. We have our podcast that we do, the Granite Shares High Conviction Podcast, which is available on YouTube and other podcast destinations. And then find us on social media usual channels on Granite Shares, on X, on LinkedIn the usual places.

Speaker 1:

Appreciate those that watch this webinar. I'm going to try to get this up on the Lead Lag Report YouTube channel fairly soon. I apologize for my voice being the way that it is. I've been too busy screaming about it. That's fine. I've been telling people to buy hips. I haven't been doing that. That's a recommendation. I can't do that. Anyway, appreciate those that watch this and hopefully we'll see you on the next webinar. Thanks, will.

Speaker 2:

Appreciate it so much. Thank you everyone for tuning in. Cheers everybody.

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Michael A. Gayed, CFA

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