HNDL: Diversified Multi-Asset Class ETF, 7% Forward Distribution Yield

The Strategy Shares NASDAQ 7 HANDL Index ETF (NASDAQ:HNDL) is a diversified, leveraged, multi-asset class ETF. The fund provides investors with diversified exposure to index funds tracking all major asset classes, focusing on investment-grade bonds, with investments in equities, high-yield bonds, REITs, MLPs, etc. The fund is sufficiently diversified that it could function as a core, even only, portfolio holding. HNDL’s diversified holdings, comparatively low level of risk, and good performance track-record, make the fund a buy.

HNDL – Basics

• Investment Manager: Strategy Shares
• Expense Ratio: 0.97%
• Forward Distribution Rate: 7.0%
• Total Returns CAGR Inception: 6.29%

HNDL – Overview

HNDL is a multi-asset class ETF. It is technically an index fund, tracking the Nasdaq 7HANDL Index. In practice, this is a bespoke, niche index, created to specifications, and so the fund is functionally closer to a smart beta fund. The fund focuses on other cheap, broad-based index funds, tracking major asset classes and indexes.

Three characteristics stand out about the fund, it’s:

• Diversified multi-asset class holdings, providing broad-based exposure to most relevant asset classes
• Comparatively low level of risk, with the fund outperforming equities and other risky asset classes during downturns and recessions
• Good performance track-record, with the fund performing in-line with its peers

The above combine to create a strong fund and investment opportunity. Let’s have a look at the points above.

Diversified Multi-Asset Class Holdings

HNDL focuses on cheap, broad-based index funds, tracking most major asset classes, including equities, bonds, preferreds, REITs, MLPs, and more. HNDL’s holdings include funds tracking most well-known indexes, including the S&P 500, Nasdaq-100, Alerian MLP index, and US Aggregate Bond Index. It also includes investments in more niche, but well-known in retirement circles, funds like the JPMorgan Equity Premium Income ETF (JEPI). Around half of the fund’s allocations are fixed, with the other half being dependent on asset class fundamentals, including yield, risk, and momentum.

Each of HNDL’s underlying funds invest in hundreds or thousands of securities, with HNDL itself providing investors with exposure to over 20,000 securities, an incredibly large number.

HNDL’s asset class and security diversification reduces portfolio risk and volatility, and is a significant benefit for the fund and its shareholders.

HNDL’s diversification also all but precludes the possibility of significant over or underperformance. With investments in several asset classes, dozens of broad-based index funds, and tens of thousands of securities, the fund is, in a sense, tracking the (public securities) market, and so will achieve market average returns. More aggressive investors looking for above-average gains, distributions or returns, should probably consider other funds. HNDL is fine, but a savvy investment in a cheaply valued or discounted fund could always be better.

Asset class allocations and largest holdings are as follows.

As mentioned previously HNDL is sufficiently diversified that it could function as a core, even only, portfolio holding. It has everything investors need: nothing is missing.

Comparatively Low Level of Risk

HNDL is a relatively safe fund for two key reasons.

First is the fund’s aforementioned diversification. With investments in dozens of index funds and tens of thousands of underlying securities, the fund can’t really significantly underperform relative to the market / most major asset classes.

Second, and most importantly, is the fact that the fund tends to focus on particularly safe asset classes. HNDL is almost always moderately overweight investment-grade bonds and preferreds relative to equities and high-yield bonds. It is also generally overweight utilities and other similar low-risk equity industry segments. HNDL’s comparatively safe holdings reduces risk, volatility, and losses during downturns. As an example, the fund posted losses of about 8% during 1Q2020, the onset of the coronavirus pandemic, and the most recent recession. HNDL significantly outperformed the S&P 500, which was down 19.5%, and slightly outperformed relative to high-yield corporate bonds and other diversified, multi-asset index funds.

HNDL has been slightly overweight bonds since the start of the year, as asset class weights are somewhat dependent on asset class fundamentals, and interest rates were quite low earlier in the year. Although the fund’s asset weights made sense at the time, equities have seen significant, above-average losses since, due to weakening economic fundamentals. Bonds have outperformed equities, so reducing bond weights was not the right call, so far at least.

HNDL’s comparatively safe holdings reduce portfolio risk, volatility, and losses during downturns, and are a significant benefit for the fund and its shareholder.

On a more negative note, the fund is modestly leveraged, with a roughly 1.25x leverage ratio. Leverage means more assets which means more income, capital gains, and losses during downturns. HNDL’s diversification and low-risk holdings more than make up for the fund’s use of leverage, as evidenced by the fund’s reasonably good performance during prior downturns. As such, HNDL seems like a relatively safe fund, on net.

Good Performance Track-Record

HNDL’s performance track-record is reasonably good, with the fund performing about as expected from a diversified, multi-asset class index fund. Total annual returns have averaged 6.3% since inception. Returns have been somewhere between those of bonds and equities, but leaning towards bonds, due to the fund being overweight said asset class. I’ve seen no time periods of sustained under-performance or over-performance, or significant gains or losses.

As an index fund, HNDL’s goal is to track the performance of its underlying asset classes, and the fund accomplishes said goal, as expected. This isn’t a significant benefit, but it is a benefit, and what index funds are meant to do.

HNDL – Distribution Analysis

HNDL, unlike the vast majority of ETFs, has a managed distribution policy. The fund targets a 7.0% annualized distribution rate on NAV, paid monthly, irrespective of underlying generation of income or capital gains. HNDL’s distribution policy is meant to provide income investors and retirees with a portion of their returns / assets every month without having to sell shares, incurring fees or spending time to do so. Investors should not consider the fund’s distribution yield as indicative of anything, but a discretionary fund policy. Assume that a significant portion of the fund’s distributions will consist of capital gains or return of capital.

HNDL’s 7.0% distribution rate is probably slightly above the expected returns of its underlying holdings / asset classes. Bonds simply don’t yield enough to sustain the fund’s distributions, and the fund is too underweight equities for these to make a difference. As such, the fund’s share price should (slowly) trend downwards, and so should its distributions. Both have been true since inception, as expected.

On a more positive note, rising interest rates means the fund’s bond portfolio should see higher interest rate payments, ultimately resulting in higher income for the fund, and more stable distributions for shareholders. HNDL’s 7.0% annual distribution was somewhat unsustainable in the past, but is looking more and more sustainable as the Federal Reserve hikes rates.

Conclusion

The Strategy Shares NASDAQ 7 HANDL Index ETF is a diversified, leveraged, multi-asset class ETF. HNDL’s diversified holdings, comparatively low level of risk, and good performance track-record, make the fund a buy.