Among other options, retirees can opt to set up annuities to receive a steady stream of cash for the time after they have stopped earning a regular income. Though annuities are generally considered to be risk-free forms of investment, they do have disadvantages; annuities are seen as largely illiquid, for instance, and they are only as strong as the insurance company or other institution that provides them.
Because there are 79 million baby boomers and thousands of them retire every day, there is more need than ever for additional options to ensure that these individuals continue to receive regular money for living expenses. The Strategy Shares Nasdaq 7HANDL Index ETF (HNDL) was created in January 2018 for this demographic and is a viable alternative to annuities, with the goal of offering a steady 7% annual distribution rate to its investors.
Key Takeaways
- HNDL is a fund-of-funds ETF that seeks to generate a high level of income for holders.
- The way that HNDL is structured, the cash flows paid to investors are distributions and not dividends.
- The fund is intended for those seeking above-average income flows and who are willing to take on a bit of additional risk over traditional income funds.
Launched in January of 2018, the Strategy Shares Nasdaq 7HANDL Index ETF (HNDL) offers retirees a solution to the issue of drawing from assets accumulated over a lifetime of investing. HNDL claims to be a first-of-its-kind target distribution ETF designed to pay investors a consistent monthly distribution. What’s more, that target distribution aims to be 7% of the fund’s per-share net asset value (NAV) on the date of a distribution’s declaration. A distribution yield of 7% is particularly attractive in the current low-interest-rate environment, with savings accounts and CDs typically paying less than 1%, and long-term U.S. Treasuries yielding below 2%.
HNDL’s portfolio manager David Miller explains that “what’s unique [about HNDL] is the 7% target distribution. As opposed to just owning a diversified portfolio, investors wouldn’t have to go to the effort to sell part of their holdings to generate what they would get from the distributions.”
Bloomberg Intelligence senior ETF analyst Eric Balchunas calls HNDL’s 7% yield “really juicy” but adds that “it’s pretty expensive, and there’s another product that does something similar and pays close to the same yield.” HNDL’s expense ratio is higher than those of comparable ETFs, with an annual gross expense ratio of 1.12% and a net expense ratio (after fee waivers and expense reimbursements) of 0.97%.
On the other hand, the First Trust Multi-Asset Diversified Income Index Fund (MDIV) aims for a yield of 6.7% and charges only 0.70%. As more entrants emerge in this niche of the ETF space, it’s likely that options will only continue to improve for retiree investors.
Investment Strategy
HNDL seeks investment results that broadly correspond, before fees and expenses, to the price and yield performance of the Nasdaq 7HANDL Index. HNDL’s mandate is to invest at least 80% of its assets in Nasdaq 7HANDL Index securities. Because the index consists of securities issued by other investment companies, HNDL operates as a fund of funds.
The Nasdaq 7HANDL Index seeks high monthly distributions while maintaining a stable net asset value over time. It represents an allocation to a balanced portfolio of U.S. equities, bonds, and alternative investments. The index is split into two equal components, with a 50% allocation to a “Core Portfolio” of fixed income and equity ETFs, and a 50% allocation to a “Dorsey Wright Explore Portfolio.”
Core Portfolio and Explore Portfolio
The Core Portfolio consists of a 70% allocation to U.S. aggregate fixed-income ETFs and a 30% allocation to U.S. large-cap equity ETFs. The fixed-income sleeve is allocated equally to the three U.S. aggregate bond ETFs with the lowest expense ratios. One-half of the equity sleeve is allocated equally to the three U.S. large-cap ETFs with the lowest expense ratios, and one-half of the equity sleeve is allocated to the largest ETF that tracks the Nasdaq 100 Index. The Core Portfolio is rebalanced monthly and reconstituted annually every January.
The Dorsey Wright Explore Portfolio is a tactical asset allocation to ETFs in various asset categories that have historically provided high levels of income. It uses a tactical asset allocation methodology that incorporates momentum, yield, and risk and is developed in consultation with Nasdaq Dorsey Wright Investment Research and Analysis.
The Explore Portfolio component is made up of the largest, least expensive, and most liquid ETFs across 12 different categories, with less than 16% of the ETF’s assets invested in any one category. These categories include ETFs focused on: preferred dividend shares, covered calls, growth and income equities, real estate investment trusts (REITs), utility stocks, high-yield bonds, mortgage-backed securities, intermediate-term corporate bonds, dividend equities, active fixed income, master limited partnerships (MLPs), and Build America Bonds (taxable municipal bonds).
Leverage
Managers of the fund utilize leverage equal to 23% of the portfolio as a means of boosting return. Leverage is calculated as a percentage of the combined base of the portfolio plus the leverage amount. Thus, 30% leverage works out to 23% of the combined portfolio plus leverage amount (30% / (100% +30%) = 23%).
HANDLS (High-Distribution AND Liquid Solutions) Indexes co-founder David Cohen explains, “We don’t like to talk about the leverage part because it upsets people, but leverage can be your friend. Take a low-risk portfolio and leverage it up to a level of risk you’re interested in taking, and you have a better overall investment experience.”
A Distribution, Not a Dividend
The distribution that HNDL investors receive is not a dividend, but rather monthly payouts at a target rate of an annualized 7% of the ETF’s per-share NAV. The ETF’s fund documents emphasize that all or part of the distribution may consist of a return of capital, meaning that, if necessary, the distribution could be funded by the capital that investors have paid into it.
The return-of-capital component of a distribution has a tax implication, in the sense that this reduces the tax basis of an investor’s shares, which will potentially increase the taxable gain when the shares are sold.
The following table shows the monthly distribution history for HNDL over the 12 months ended December 2021.
HNDL returns
As of Sept. 30, 2021, HNDL had returned 7.09% per annum, right in line with its target distribution rate.
HNDL Holdings
HNDL is a well-diversified, multi-asset portfolio of ETFs. As of Dec. 14, 2021, its top 10 holdings are shown in the table below.
Does the Market Price of HNDL Vary From Its NAV?
Yes, it does. Like all ETFs, the market price of HNDL fluctuates in response to changes in the NAV, as well as supply and demand for its shares or units. During periods of market stress, market makers may refrain from making a market in shares of ETFs and in executing trades, which may lead to ETF shares trading at a discount to NAV. For example, HNDL traded at a 3.07% discount to NAV on March 17, 2020, when equities were amid their massive “COVID correction.” Conversely, as markets rebounded that summer, HNDL traded at a 1.16% premium to NAV on July 27, 2020. Overall, in 2020, HNDL traded at a premium to NAV on 156 trading days, and at a discount to NAV on 97 trading days. Note that the actual premium or discount of HNDL’s price to its NAV is quite small because HNDL traded within +0.5% or -0.5% of NAV on 220 out of 253 trading days in 2020, or 87% of trading days in that year.
How Often Does HNDL Pay a Distribution to Its Shareholders?
HNDL pays its distribution monthly, generally in mid-month.
How Can I Buy Shares of HNDL?
You can buy shares of HNDL just like you would any other stock or ETF, through your online brokerage account or investment advisor.
Why Does HNDL Employ Leverage and How Much Is It?
HNDL’s fund managers use equal to 23% of the total portfolio as a means of boosting returns. Leverage is calculated as a percentage of the combined base of the portfolio plus the leverage amount. 30% leverage works out to 23% of the combined portfolio plus the leverage amount (30% / (100% +30%) = 23%).
Who Is HNDL’s Portfolio Manager and Investment Advisor?
As of Dec. 14, 2021, HNDL’s portfolio manager is David Miller and its investment advisor is Rational Advisors, Inc.
The Bottom Line
HNDL comes with a great sales pitch: 7% target distributions every year with relatively low risk. Is this too good to be true, especially in the low-interest-rate environment we’ve seen over the past decade? The fund has kept its promise to return 7% in distributions each year while keeping its share price stable—but because the fund has only been around since 2018, only time will tell if it can keep it up.