How HNDL Offers a 7% Distribution Through True Diversification
We sat down with David Cohen and Matthew Patterson of HANDLS Indexes and David Miller of Catalyst Funds to discuss the Strategy Shares Nasdaq 7HANDL™ Index ETF (HNDL), which aims to provide a 7% monthly distribution to investors through a well-diversified, multi-asset portfolio of ETFs. Learn more about the benefits of investing in HNDL below:
1. HNDL ETF is split into two components – a 50% allocation to some of the largest, low-cost fixed-income and equity ETFs, which you refer to as the Core Portfolio, and a 50% allocation to the Dorsey Wright Explore Portfolio – which is a more tactical allocation with U.S. fixed income, blend, equity, and alternative assets that have historically provided higher levels of income. How did you develop this approach, and what is the investment thesis behind its success?
When we launched HNDL, interest rates were at rock bottom levels and investors struggling to find yield often went to closed end funds. Our approach here is to replicate what a closed-end fund does in terms of providing diversified equity exposure to income investors but deliver it in a more efficient and affordable manner.
The bottom line is the market price of a closed-end fund fluctuates around the net asset value (NAV) on a regular basis and that premium discount volatility introduces a level of volatility that provides no return. We created HNDL to give similar investment results as this category of investments that have been historically popular, but we’ll eliminate the volatility that provides no additional return. We believe that thesis has fundamentally played out.
We’re also considerably less expensive than closed-end funds. All in, expense ratios of closed-end funds can be over 200 bps. For us, we’re still below 100 bps. Obviously, we’ve been challenged because the bond market had a rough 2022, and we have a 70/30 fixed income/equity core allocation, but as we’ll explain, the current investment environment is as attractive as it gets.
HNDL Characteristics as of Sept. 30, 2023:
2. The Fund has historically delivered a monthly distribution of 7% - given this, which types of investors do you think can benefit most from an investment in HNDL?
We see two types of people in the investment world: those in accumulation mode who are saving money on a month-to-month basis, and then those in the decumulation phase of their investment lives, during which people are taking money out to spend in retirement. The reality is very few people have enough money to live off of interest and dividends.
We’ve said from the beginning that investors need options to decumulate their assets in a tax-efficient manner. They can sell individual securities and deal with tax implications, or with HNDL, we’ll put it in a nice package, easy to understand, and pay a 7% distribution.
The portfolio reallocates every month; it’s like an automated, efficient stream of income. So, any investors who are looking for a tax-efficient way to generate an automated 7% distribution could benefit from HNDL.
3. Looking at the Fund’s performance, it has outperformed the Agg thus far in 2023, over the past year, and over 3 years, 5 years, and since the product’s inception in 2018. What has been the key to outperformance?
Investors have been shifting to bonds, and we view HNDL as a “Bond Plus” type of investment. But the biggest factor in our outperformance is our equity beta category. We have a 30% equity allocation, half of which is in the Invesco ETF that tracks the Nasdaq-100® (QQQ) . That category has outperformed the S&P 500 by large margins - in part due to our QQQ exposure.
We have tried, successfully we might add, to be early discoverers of certain funds that people like, but the simple answer as to what has driven our success is diversification.
A pure bond portfolio would have underperformed over the long term with our level of risk, but by adding risk in a diversified manner, we’re enhancing the overall structure of the portfolio. Over the short term, you may see more volatility in HNDL than you would holding purely bonds, but diversification is the only free lunch in investing – it mirrors Harry Markowitz’s modern portfolio theory. And in the long term, we believe investors will see the benefits.
The behavioral aspects of investing can also be difficult, but our systematic approach helps us be consistent and deliver performance that’s consistent with historical averages.
4. Given interest rates seem to be leveling off as the Fed seemingly winds down its fight to combat inflation, albeit at a level much higher than we saw years ago, how does this current market environment impact fund performance? When are the best times to invest in HNDL?
The headline right now is you can pick up a 5.5% yield on 30-day Treasuries – that’s a tough hurdle for a risk product like ours to compete with. But that’s not forever. Once we enter a rate-cutting environment, those attractive short-term rates will go away. At the long end of the curve, we’re now in a position where we’re collecting 5% interest and seeing a lot less pressure on equity allocations. As rates go lower, you’re going to see capital gains on the fixed income side.
We’re more bullish on the strategy than we’ve ever been. If you’re already earning more than 5% in interest income on the fixed income side, it’ll be much easier to meet that 7% hurdle moving forward.
We don’t think we’ve seen a better income investing environment in 20 years outside of maybe 2007. We’re constantly seeing signs that the world is weakening. Personally, we’d rather have a balanced portfolio that takes advantage of the really juicy rates we’re seeing across the yield curve. If you’re an income investor and you’re looking to deliver an income stream over the next decade, right now is a great time to be in HNDL. You’ve got 70% in bonds offering solid yields and an equity kicker on top of it.
5. Investors have plenty of options when it comes to ETFs – what makes HNDL unique?
The most attractive part about HNDL, in our opinion, is the consistency of the approach and the fact that it’s built on the foundation of everything widely accepted in finance. In short, the diversification basket always wins. This is a unique product designed to deliver an efficient monthly cash flow on a tax-efficient basis.
We built this strategy based on modern portfolio theory. We truly believe investors will earn the highest risk-adjusted returns if they have the optimal portfolio. We can all debate what that is, but we’ve spent time researching and believe we have an attractive product for investors.
There are 10,000 baby boomers retiring every single day, and they need investment options. Yes, they can look to annuities, but then they lose control of their money, and there are a lot of fees baked in. HNDL packages everything together for the investor and provides a monthly income check higher than a 4% distribution solution.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
HANDLS Indexes
Bryant Avenue Ventures LLC (“BAV”), the creator of HANDLS Indexes, is an index developer focused on creating investment solutions that address the underserved needs of financial advisors and their clients
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