The combination of a middling Process Pillar rating and a Below Average People Pillar rating limit  GraniteShares HIPS US High Income ETF to a Morningstar Medalist Rating of Neutral.  Fees are a weakness here. The strategy's lofty fees are a high hurdle to clear, as it is priced within the highest quintile among peers.  

 The team managing the passive strategy earns a Below Average People Pillar. The strategy earns an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in the Europe-Developed region and has an overweight in developed markets regions compared with category peers. The strategy's parent organization doesn't stand out, earning the firm an Average Parent Pillar rating. It has displayed a handful of investor-friendly attributes including low portfolio manager turnover and a commendable risk-adjusted track record.

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Morningstar's evaluation of this fund's process seeks to determine how repeatable, consistent, and reliable it is, and whether management maintains a competitive advantage. GraniteShares HIPS US High Income ETF earns an Average Process Pillar rating.  The most important driver of the rating is the firm's five-year retention rate of 100% over the period. This fund tracks an index, which also increases its process rating. Historical data, like Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Lastly, the process is limited by the fund's unremarkable long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the process has struggled over that period.

 The investment strategy as stated in the fund's prospectus is as follows: 

 The investment seeks to track the performance, before fees and expenses, of the EQM High Income Pass-Through Securities Index.  The fund employs a "passive management"-or indexing-investment approach designed to track the performance of the index. The rules-based index measures the performance of up to 40 high income U.S.-listed securities that typically have "pass-through" structures that require them to distribute substantially all of their earnings to shareholders as cash distributions. This "high income, and pass-through" strategy is known as HIPS.  

 The portfolio is overweight in energy and real estate relative to the category average by 31.7 and 28.5 percentage points, respectively. The sectors with low exposure compared to category peers are technology and healthcare, underweight the average by 21.6 and 13.1 percentage points , respectively. The portfolio is overweight in North America by 23.3 percentage points compared with the category average, and Emerging Europe's allocation is similar to its peers. The regions with low exposure compared to their category peers are Developed Europe and United Kingdom, underweight the average by 9.8 percentage points and 3.8 percentage points, respectively.

 The fund’s bond sleeve takes on more credit risk but remains less exposed to interest rate risk relative to peers. More explicitly, the fund’s average credit rating is B compared with the category average’s BB but has a shorter average duration of 3.0 years to the average’s 7.1 years.

Average

Process

Graniteshares’s team earns a Below Average People Pillar rating. The team benefits from the firm's five-year retention rate of 100%. However, the rating is limited by the parent firm's five-year success ratio of 25%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. The parent's subpar success ratio suggests that the firm could do better across its fund lineup. A high expense ratio, with fees ranking in its category's second most expensive quintile, also weakens the team. Fees reduce net returns, giving this team a significant hurdle to overcome.

Below Average

People

In a competitive industry, Graniteshares doesn't differentiate itself enough, leading to an Average Parent Pillar rating. A source of strength is that the firm has been skilled at retaining portfolio management talent, providing continuity for strategies, as shown by low turnover over the past five years compared with others in the industry. Graniteshares's risk-adjusted performance compares similarly to competitors. Across its open-end and exchange-traded funds, the firm’s average three-year Morningstar Rating is 3.3 stars, which is about standard. The longest-tenured managers’ average tenure is slim, two years, compared with peer firms. This contributes negatively to the rating as the current managers have limited experience running strategies at the firm.

Parent

GraniteShares HIPS US High Income ETF

HIPS tracks an index of assets that tend to produce high income and pass through that income without being taxed at the constituent level. These include REITs, MLPs, BDCs and debt-based closed-end funds.

HIPS tracks an equal-weighted index of US-listed assets that produce high income and pass through that income without being taxed at the constituent level. The portfolio includes REITs, MLPs, BDCs, and closed-end funds.

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