It’s no secret that finding income in today’s economic and market environment is challenging. It was difficult to generate yield even a year ago, but the coronavirus pandemic has only exacerbated matters by inducing rock-bottom interest rates, widespread dividend cuts and salary reductions nationwide.

In a recent interview with ETF Trends, GraniteShares Founder and CEO Will Rhind shared more on the U.S. income crisis and how investors can uncover yield through the GraniteShares HIPS U.S. High Income ETF (NYSE Arca: HIPS), which generated 9.78% income as of Nov. 30.

ETF Trends: For decades, we have seen falling interest rates, but the situation has now reached a breaking point. Tell us about the current income crisis in the U.S.

Will Rhind (WR): The inability to generate sustainable, passive income is one of the largest problems in today’s market. Left out of the conversation on government stimulus, industry bailouts and COVID-19 relief is that savers dependent on investment income have been stranded. What transforms this income crunch into a full-fledged income crisis is the aging of America’s demographic cohorts. When the 10-year Treasury yields 0.85%, the 1990s playbook for income essentially ensures investors will fail to meet their income goals.

When junk bonds are yielding only around 4.74%, investors need to go elsewhere for actual, meaningful income. Between falling bond yields and dividend cuts on an unprecedented scale, strategies used in the past no longer work. Intuitively, why would an income strategy primed for 6% interest rates also work in a zero-rate environment? Nonetheless, the financial community seems insistent on ramming the square peg through the round hole, no matter how little legacy approaches can achieve. Let’s be frank, income is essential — you cannot live without it, and people do not know what to do.

ETF Trends: Are there still opportunities to generate a high yield in this environment?

WR:  There is a fundamental misunderstanding about how to generate sustainable yield. Many advisors are either betting on continued capital gains for income or cobbling together very elaborate packages that still only generate 3-4% yield — or put in other words, not enough. Ironically, I even spoke to a portfolio manager who was relying on selling call options on gold to generate investment income.

Compounding this confusion, many underestimate the level of yield needed to generate real cash flows. After taxes, inflation, fund expenses and advisory fees, investors need around 4.07% yield from dividends and 5.42% from bond coupons just to break even. If investors are not reaching at least 0% on a real after-tax, after-fee basis, then they are only falling behind. This is the crux of the income crisis — not a single conventional approach can get over these hurdles. Currently, the Agg pays out 2.1%, large cap stocks 1.6%, real estate 2.8% and high-dividend stocks 3.0%. Some savers are betting on individual dividend stocks, but this is extremely risky and non-diversified. If investors are looking for high-income opportunities, they need to go elsewhere in the market, and pass-through securities represent one of the few realistic possibilities.

ETF Trends: What are pass-through securities and why are they able to generate high yields?

WR: Pass-through securities are an underutilized class of investments that enable very high levels of income, even in this yield-starved environment. Pass-through securities can accomplish this feat because they not only pay out substantially all their earnings, but are also exempt from corporate taxation. This two-fold advantage effectively pipelines corporate cash flows to end investors. It’s your income; why let others claim it?

There are four main categories that make up the pass-through ecosystem: real estate investment trusts (REITs), business development companies (BDCs), closed-end funds (CEFs) and master limited partnerships (MLPs). While many investors are familiar with these asset classes, most are underexposed because they simply fall outside the scope of major indices. Even if investors are not exclusively yield focused, pass-through securities offer and can be valuable from a diversification standpoint.

ETF Trends: Your firm offers the GraniteShares HIPS U.S. High Income ETF (HIPS), which is historically one of the highest-yielding ETFs in the U.S. market. Tell us more about it.

WR: When it comes to pass-through securities, diversification is key for sustainable yield in varying economic environments. The GraniteShares HIPS ETF yielded 9.78% as of the end of November — 10 times the 10-year Treasury — by combining 60 pass-through securities across four economic sectors. Importantly, HIPS has maintained an uninterrupted 10.75-cents-per-share monthly distribution for nearly six years. Just as important as the level of yield is the consistency of income, as too many companies and funds stranded investors with cut or suspended distributions during the depths of the crisis, exactly when income was needed most.

By screening the more than 900 U.S. pass-through securities for the highest-yielding and least volatile investments, HIPS has delivered multi-year income consistency. In fact, fully 99% of HIPS allocated capital for 2020 continued generating cash distributions. Finally, over 50% of HIPS distributions since inception were treated as return of capital from underlying holdings (the fund itself was not returning capital), providing favorable tax treatment on the income. The HIPS strategy is all about finding yield when the conventional sources come up dry.

ETF Trends: What impact does HIPS have on a 60/40 portfolio?

WR: The HIPS ETF can be a powerful tool for income replacement. Given that HIPS is negatively correlated to bonds and only moderately correlated to stocks, the ETF can span the equity and fixed income sleeves of a 60/40 portfolio to supplement baseline yield. For instance, a one in 10 allocation to HIPS increases portfolio-wide yield by 45%, and a 22% allocation has an impact on retirement finances equivalent to moving from California to Mississippi (the most expensive to least expensive state). If people are willing to move across state lines, why not first consider moving across asset classes? There are over 2,400 ETFs in the U.S. market, but few can offer a meaningful solution to the income crisis; HIPS is our proposal.

For more information, visit https://graniteshares.com/institutional/us/en-us/etfs/hips.