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.

Investing involves risk; Principal loss is possible. Investments in debt securities typically decrease when interest rates rise. This risk is usually greater for longer term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher rated securities. Investments in foreign securities involves greater volatility and political, economic, and currency risks and differences in accounting methods. Investments in smaller companies involve additional risks, such as limited liquidity and greater volatility. MLPs are subject to certain risks inherent in the structure of MLPs, including complex tax structure risks, limited ability for election or removal of management, limited voting rights, potential dependence on parent companies or sponsors for revenues to satisfy obligations, and potential conflicts of interest between partners, members and affiliates. Investments in asset-backed and mortgage-backed securities include additional risks including credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. A REIT’s share price may decline because of adverse developments affecting the real estate industry. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

An investment in the Fund does not receive the same tax advantages as a direct investment in a Pass-Thru Security. Funds accrue deferred income taxes for future tax liabilities associated with the portion of Pass-Thru Security distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result the Fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. The potential tax benefits from investing in Pass-Thru Securities depend on them being treated as partnerships for federal income tax purposes.

Diversification does not assure a profit or protect against loss in a declining market.

Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds’ prospectus, which may be obtained by clicking here. Read the prospectus carefully before investing.

The TFMS HIPS 300 Index is constructed to capture 300 high income securities, typically with pass-through structures, across the following sectors: (i) closed-end funds (“CEFs”), (ii) mortgage real estate investment trusts (“REITs”), (iii) commercial equity REITs, (iv) residential/diversified REITs, (v) asset management and business development companies (“BDCs”), and (vi) energy production and energy transportation & processing companies. Energy-related companies included in the Index are expected to primarily be structured as master limited partnerships (“MLPs”). CEFs included in the Index are limited to taxable, debt-based funds and may include CEFs that invest primarily in bank loans, high-yield securities (also known as “junk bonds”), foreign securities (including those in emerging markets), and mortgage- or asset-backed securities. One may not directly invest in an index.

The Standard & Poor's 500 Index (S&P 500) is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

This information is not an offer to sell or a solicitation of an offer to buy shares of any Funds to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

Please consult your tax advisor about the tax consequences of an investment in Fund shares, including the possible application of foreign, state, and local tax laws.

Exchange Traded Concepts, LLC serves as the investment advisor and Master Income ETF. The Funds are distributed by Quasar Distributors, LLC, which is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.