On this episode of “What Makes That Ticker Tick,” VettaFi CMO Jon Fee caught up with Jane Edmondson, co-founder and CEO of EQM Indexes and the new head of thematic strategy at VettaFi, to discuss the EQM High Income Pass-Through Securities Index (HIPSTR).
The HIPSTR Index
John Fee: Welcome back to What Makes That Ticker Tick. I’m your host, and this is the show where we like to pop the hood on a specific ticker to find out what’s inside.
Today I’m joined by none other than Jane Edmondson, head of thematic strategies here at VettaFi. Jane, I know you were at Schwab Impact in Philadelphia last week. Tell us where you are this week.
Jane Edmondson: I am in San Diego, California. Although, when I was in Philadelphia, it was great weather and it was almost like being in San Diego. So I think the people that went to the conference really lucked out in that regard.
What Is the Objective of the HIPSTR Index?
John Fee: There’s nothing like being away from home and having the weather feel like home.
Jane, today our topic is all about the ticker HIPSTR, H-I-P-S-T-R. We’re not talking about avocado toast, we’re certainly not talking about beards. We’re talking about the EQM High Income Pass-Through Securities Index, a portfolio that you know very well. I want to dive right in on index use cases. Tell us, what is the objective of HIPSTR or the investment case behind the index.
Jane Edmondson: So HIPSTR is about income. It generates monthly income using alternative investments such as things like closed-end funds, MLPs, BDCs, and REITs. Tthese are all high-income pass-through securities. And that’s where the name HIPSTR comes from. Again, it’s not about avocado toast, it’s about high-income pass-through securities.
Those are securities that have to pay at least 90% of their income to shareholders. And in doing that, they have specialist tax status, so it’s beneficial to them. But more importantly to the people who own these investments, they get a nice high alternative source of income. And when I say “alternative,” these are not correlated with traditional fixed income instruments; it’s not highly correlated with the market. So you’re getting a different type of diversified exposure and a high level of income, which I think in this environment, a lot of people are looking for that, especially with the performance of bonds in 2022.
What Separates the Index From Other Products in the Marketplace?
John Fee: Absolutely. It reminds me of the successful Income Strategy Symposium we just had here at VettaFi. Lots of engagement, lots of people dialing in, lots of follow-up questions from advisors. I want to move on to another question within the category of index use cases.
At a high level, Jane, what makes the index different from other products or solutions in the same investment style in the marketplace? Is it truly unique, or are there other products out there?
Jane Edmondson: There’s no product out there as far as I know that has this blend of investments. And it is unique. It gives you great diversification with a high level of income. The dividend yield that is thrown off on a monthly basis is close to 11%. That’s really attractive, especially if you take into consideration that it’s not using options, it’s not using leverage.
This is purely the dividend flow from these pass-through investments. So it is unique in that regard. I think it would fall into the category of alternative income or multi-asset strategy. That’s what would fall as far as the style box. But from an investment perspective, you get great diversification. It’s not correlated with other parts of the market. And it’s not correlated within itself. So you get a nice blend of 25% in each category, so it’s well diversified. Again, it’s throwing off that great income. I think in this environment, investors and advisors alike are looking for stable sources of income that are going to do well in all the different types of market environments.
HIPSTR’s Index Construction
John Fee: Let’s dive into index construction. I know I first started to think about this product through how I first learned about passive income with rental properties and so forth. Probably more common for the masses. But today there’s a product like the EQM High Income Pass-Through Securities Index that goes beyond rental properties or REITs, for example.
Jane, I want to ask you about index construction. What is the starting universe for the index that then starts to go into these 25, 25, 25, 25 buckets?
Jane Edmondson: We start with a universe of MLPs, business development companies. I think there are only about 40 of them that are publicly traded out there, so that’s kind of a smaller universe. And then closed-end funds, and then a universe of REITs. That would include all types of REITs — everything from commercial REITs to residential REITs to even things like communication towers. So it’s a broad opportunity set. And then what we do is try to isolate it to the top 10 names in each of those categories.
And what we’re screening on are certainly market cap and liquidity, or in the case of closed-end funds, the amount of assets that are under management, but we’re also looking at stability of income. So we’re looking for a high dividend yield, but also low volatility. And that seems to be the magical combination. It’s not enough to have a high level of income; you want to know it’s sustainable. So that’s how this index construction is able to deliver a very stable level of income through time in a lot of different market environments.
The Index’s Rebalancing Strategy
John Fee: Very interesting. So you work the starting universe down to this nice, clean, focused portfolio of 40 securities, 10, 10, 10 and 10, across the categories that were just on screen. How often does it rebalance or reconstitute?
Jane Edmondson: It rebalances quarterly, so at the end of every quarter. And then the actual names themselves, it’s an annual reconstitution. At the end of the year, we’ll be selecting the names for the following year. Again, we’ll be using those same screening criteria where we’re really looking for the securities that have the highest level of income and also the lowest volatility in that category.
How Has the Index Performed YTD and in the Long Term?
John Fee: Let’s move on to performance measurement. Tell me about the performance of HIPSTR. How has the index performed year to date, and then also over the longer term, perhaps since inception?
Jane Edmondson: Year to date, I think it’s pretty much flat for the year if you take into account that it is throwing off that big dividend yield. Really the goal is with the diversification to keep the principal value pretty much the same and then really focus on that high-income opportunity with that close to 11% monthly dividend. So it really is an income product, but we are trying to keep it well diversified so that it does have that stability of principal in it. Because these categories tend to do well at different times.
For example, last year, MLPs with energy had a great year. As we know, some of the products are also on VettaFi. So it was a great year for energy. Energy was the outperforming segment within the HIPSTR portfolio. It’s done really well in inflationary environments. Typically, both real estate and energy do well in those environments. In a rising rate environment, it tends to do well as a lot of the BDCs, which, for example, are using floating rate debt. So it really does well. It’s like an all-weather product, I think you would say. Because of the diversification and because these assets are not correlated, they do well in different market environments.
The Dividend Performance
John Fee: It sounds like, just listening to you, I should think more about performance through the lens of the dividend it’s paying versus just traditionally looking at performance, how it’s doing, beating the market.
Jane Edmondson: Yes, absolutely. And there are a lot of income products that have become very popular, especially these alternative income products. I think investors and advisors are looking for sources of income other than dividends, and regular stock dividends that are giving impact going on in the market and are competing with bonds. And then certainly fixed income has been problematic. I think people are starting to question the whole 60/40 paradigm. So having an alternative sleeve with alternative income, I think really makes a lot of sense.
Some of the Index’s Current Constituents
John Fee: I think so too. OK, Jane, we’ve covered index use cases. We’ve covered index construction. We’ve talked a lot about performance through the lens of how the dividends are paying out.
We’re going to move on to my final segments on What Makes That Ticker Tick. It’s my favorite part — what’s inside. So I want to go back and show the portfolio breakdown, the 25% in MLPs, the 25% in BDCs, the 25% in closed-end funds, and then the 25% in REITs. I want to hear from you what’s inside. Can you talk about some of the constituents of the index? Give us some of the names, and some of the flavors.
Jane Edmondson: So in the MLPs, those are the midstream names primarily. These are master limited partnerships, again, throwing out 90% of their income on a pass-through basis. Energy has done really well. Well, it did really well last year. It continues to do well this year as well. The energy transition obviously is occurring as we move to cleaner forms of energy. But certainly, in this environment, it’s not going to happen overnight, and energy continues to do well and it tends to keep up with inflation as well.
BDCs are also a very interesting category. I think a lot of investors do not have exposure there. And this is a way to get public liquid access to both private equity and private debt. So it’s a great category. These are liquid alternatives. And I think the only thing you have to be cognizant of with regard to BDCs is they do have high internal expenses. So if you’re investing in those, you have to take that into consideration, especially in a fund-to-fund construct, it does look like the expense ratio is really high. But that’s really a function of the way those fees from the BDCs — things like the salaries of the people that are managing them — are actually included in the expense ratio. So it makes it seem artificially high.
And then closed-end funds, I think a lot of investors obviously are familiar with those, especially income investors. One of the things that we found that I think is interesting when we constructed this index, is that I think a lot of investors think it’s good to buy closed-end funds at a discount. We actually found that wasn’t the case, which I think dispels the common wisdom there. We found that a lot of these closed-end funds are trading at a premium for a reason, because maybe they’re in a good asset category, they have really good management. So that’s something unique, I think, to our approach.
And of course, real estate investment trusts are such a diverse group. So the hope there is to focus on the top 10 best opportunities from an income standpoint and from a low volatility standpoint to try to harness the opportunities there in the REIT space.
John Fee: Fantastic. Thank you so much, Jane, head of thematic strategies here at VettaFi. Thank you for joining us on What Makes That Ticker Tick today. It was all about HIPSTR, the EQM High Income Pass-Through Securities Index.
Jane, it’s always great to see you. Thank you for joining us from sunny San Diego. Until next time.
Jane Edmondson: Thanks, John.
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