HNDL: diversified multi-asset fund of funds, with a yield of 7% (NASDAQ: HNDL)

NASDAQ 7 HANDL Index ETF Equity Strategy (NASDAQ:HNDL) claims to be a one-of-a-kind target distribution traded index fund (“ETF”) designed to pay investors a consistent monthly distribution and targets a 7% payout. Such a yield is quite attractive in the current low interest rate environment, with long-term US Treasuries yielding less than 2%. However, delivering such a return on a consistent basis for an ETF that has huge investments in fixed income securities raises some doubts. I would like to understand if such distribution is sustainable in the long run.

Nasdaq 7HANDL™ Equity Index ETF Strategy

Strategy Shares NASDAQ 7 HANDL Index ETF was created by Strategy Shares on January 16, 2018, and is domiciled in United States. This ETF is a fund of funds and invests in funds that invest in the public equity and fixed income markets of the United States. For its equity portion, it invests in funds that invest in mid- and large-capitalization stocks in diversified sectors. Over 30% of the entire portfolio is invested in large cap stocks, while 14% is invested in mid caps.

For its fixed income portion, it invests in funds that invest in aggregate US bonds of any maturity or duration that are rated above BBB- by S&P. HNDL fully replicates the performance of the Nasdaq 7HANDL™ index. The ETF has adopted a policy of paying monthly distributions on shares of the Fund at a target rate which represents an annualized payout of approximately 7% on the net asset value (NAV) per share of the Fund. All or part of a distribution may consist of a return of the capital of the initial investment and the distribution rate may be changed at any time.

HNDL Investment Strategy

According to the company’s fact sheet, the index consists of ETFs divided into a core portfolio and a Dorsey Wright Explore portfolio. The core portfolio consists of a 70% allocation to US global fixed income ETFs and a 30% allocation to US large cap equity ETFs. The Dorsey Wright Explore Portfolio consists of an allocation to ETFs in various US asset classes that have historically provided high levels of income, using a tactical asset allocation methodology developed in consultation with Nasdaq Dorsey Wright Investment Research & Analysis which seeks to integrate momentum, return and risk. This index of 19 ETFs represents approximately 20,000 individual underlying securities.

The Nasdaq 7HANDL™ Index represents an allocation to a balanced portfolio of US stocks, bonds and alternative investments that uses leverage in an amount equal to 23% of the portfolio. Fund managers use leverage as a way to increase returns. The index is broadly diversified and seeks to offer the potential for high monthly distributions while maintaining a stable net asset value over time. As a result, HNDL investors can expect a consistent monthly distribution with high yield for the time being. However, HNDL will have similar risk characteristics to major US financial markets and will generally rise and fall with prevailing market conditions.

HNDL portfolio

Over 60% of HNDL funds are invested in 7 funds, namely Vanguard Total Bond Market ETF (BND), SPDR Portfolio Aggregate Bond ETF (SPAB), iShares Core US Aggregate Bond ETF (AGG), Invesco QQQ ETF (QQQ) , Alerian MLP ETF (AMLP), Utilities Select Sector SPDR ETF (XLU), Vanguard Dividend Appreciation ETF (VIG). An additional 10% of HNDL is held in cash. Thus, the performance of these seven ETFs will primarily determine the performance of HNDL. Unfortunately, these seven ETFs combined do not project a rosy image. HNDL also has a much higher gross expense ratio of 1.12%, which eats away at returns for its investors. This expense ratio is higher than that of comparable ETFs, such as 0.8% of that of the First Trust Multi-Asset Diversified Income Index Fund (MDIV).

XLU has seen double-digit price growth most of the time, returning over 3%. VIG also saw similar growth in the 10-15% range, but with a return of less than 2%. AGG, BND and SPAB have experienced negative price growth over the past 10 years and have returned less than 3%. AMLP generated a return of nearly 8%, but price growth was negative. Only QQQ has generated huge price growth in the range of 25-30% in the medium to long term. However, in 2022 the fund has lost nearly 18% of its value. Moreover, the fund has a negligible return of only 0.5%.

Investment thesis

Strategy Shares Nasdaq 7HANDL™ Index ETF is heavily invested in seven ETFs, which offer mixed performance. XLU, VIG and QQQ generated impressive price growth, which had been erased by the negative price performance of AMLP, AGG, BND and SPAB. When it comes to yield, only AMLP generates sufficient yield. All other funds had a return of between 0.5 and 3%. Thus, it is quite clear that HNDL pays a dividend on its capital. This should come as no surprise, as the fund has a stated policy of distributing a portion of the dividend from its capital.

The fund may also change its distribution rate at any time. In the absence of any price growth, this fund of funds will become unattractive. Over the past 4.5 years, the fund has failed to generate positive price growth. The only good thing is that most of the ETFs he has invested in pay a monthly distribution. However, this distribution may not be sustained over the long term due to HNDL’s policy of paying dividends out of its capital. So, despite such a high yield and monthly distribution, Strategy Shares Nasdaq 7HANDL™ Index ETF is best avoided.

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