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

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The NASDAQ 7 HANDL Index ETF Equity Strategy (NASDAQ:HNDL) is a diversified, leveraged, multi-asset ETF. The fund offers investors diversified exposure to index funds listing all major asset classes, focusing on investment grade bonds, with equity investments, high yield bonds, REITs, MLPs, etc. The fund is sufficiently diversified to be able to function as a main or even sole portfolio. HNDL’s diversified holdings, relatively low level of risk and good track record of performance make the fund a buy.

HNDL – Basics

  • Investment manager: Strategy stocks
  • Expense ratio: 0.97%
  • Forward payout rate: 7.0%
  • Total returns Creation CAGR: 6.29%

HNDL – Overview

HNDL is a multi-asset ETF. He is technically an index fund that tracks the Nasdaq 7HANDL index. In practice, it is a bespoke niche index, created according to specifications, and the fund is therefore functionally closer to a smart beta fund. The fund focuses on other low-cost, broad-based index funds, tracking major asset classes and indices.

Three characteristics emerge from the fund, namely:

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

The above elements combine to create a solid fund and investment opportunity. Let’s take a look at the points above.

Diversified holdings across multiple asset classes

HNDL focuses on low-cost, diversified index funds, tracking most major asset classes, including stocks, bonds, preferred stocks, REITs, MLPs, and more. HNDL’s holdings include funds that track popular indices including the S&P 500, Nasdaq-100, Alerian MLP Index and US Aggregate Bond Index. It also includes investments in more specialized funds, but well known in retirement circles, such as the JPMorgan Equity Premium Income ETF (JEPI). About half of the fund’s allocations are fixed, with the other half dependent on asset class fundamentals, including return, risk and momentum.

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

HNDL’s diversification of asset classes and securities reduces portfolio risk and volatility and is a significant benefit to the fund and its shareholders.

HNDL’s diversification also excludes the possibility of significant outperformance or underperformance. With investments in several asset classes, dozens of broad index funds and tens of thousands of securities, the fund somehow follows the market (of public securities) and will thus achieve the average returns of the market. More aggressive investors looking for above-average gains, distributions, or returns should probably consider other funds. HNDL is finebut a savvy investment in a low-value or discounted fund might still be preferable.

Breakdowns by asset class and largest holdings are as follows.

HNDL weight

HNDL Fact Sheet

HNDL Main Holdings

HNDL Fact Sheet

As mentioned earlier, HNDL is diversified enough to be able to function as a primary, if not sole, wallet. It has everything investors need: nothing is missing.

Relatively low level of risk

HNDL is a relatively safe fund for two main reasons.

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

Second, and most importantly, the fact that the fund tends to focus on particularly safe asset classes. HNDL is almost always moderately overweight investment grade bonds and preferred stocks relative to equities and high yield bonds. It also typically overweights utilities and other similar low-risk segments of the equity industry. HNDL’s relatively safe holdings reduce risk, volatility and losses during downturns. For example, the fund recorded losses of around 8% during the first quarter of 2020, the start of the coronavirus pandemic and the last recession. HNDL significantly outperformed the S&P 500, which fell 19.5%, and slightly outperformed high-yield corporate bonds and other diversified, multi-asset index funds.

HNDL ETF Price
Data by YCharts

HNDL has been slightly bonds have been overweight since the start of the year, as asset class weightings are somewhat dependent on asset class fundamentals, and interest rates were quite low earlier in the year. Although the fund’s asset weightings made sense at the time, equities have since suffered large, above-average losses due to weakening economic fundamentals. Bonds have outperformed equities, so reducing bond weightings was the wrong move, at least until now.

HNDL ETF Total Return
Data by YCharts

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

On a more negative note, the fund is moderately leveraged, with a leverage ratio of around 1.25x. Leverage means more assets, which means more income, capital gains, and losses during downturns. HNDL’s diversification and low-risk holdings more than compensate for the fund’s use of leverage, as evidenced by the fund’s reasonably good performance in previous downturns. As such, HNDL appears to be a relatively safe fund on the net.

Good performance record

HNDL’s track record is reasonably good, with the fund performing roughly as expected for a multi-asset class diversified index fund. Total annual returns have averaged 6.3% since inception. Yields are somewhere between those of bonds and equities, but lean towards bonds, as the fund is overweight in this asset class. I saw no periods of sustained underperformance or outperformance, or significant gains or losses.

HNDL vs SPY
Data by YCharts

As an index fund, HNDL’s objective is to track the performance of its underlying asset classes, and the fund achieves this objective, as expected. That’s not a important advantage, but it is a benefit, and what index funds are supposed to do.

HNDL – Distribution Analysis

HNDL, unlike the vast majority of ETFs, has a managed payout policy. The fund targets an annualized distribution rate of 7.0% on net asset value, paid monthly, regardless of the underlying generation of income or capital gains. HNDL’s distribution policy aims to provide income investors and retirees with a portion of their returns/assets each month without having to sell shares, incur fees or waste time doing so. Investors should not take the fund’s distribution yield as an indication of anything, but as discretionary fund policy. Assume that a significant portion of the fund’s distributions will consist of capital gains or return of capital.

The payout ratio of 7.0% of HNDL is Most likely slightly above the expected returns of its underlying holdings/asset classes. Bonds simply don’t pay enough to support the fund’s distributions, and the fund is too underweight in equities to make a difference. As a result, the fund’s share price should (slowly) decline, along with its distributions. Both are true from the start, as expected.

HNDL ETF dividend
Data by YCharts

On a more positive note, rising interest rates mean that the fund’s bond portfolio should experience higher interest rate payments, which will ultimately translate into higher income for the fund. and more stable distributions for shareholders. HNDL’s 7.0% annual distribution was somewhat unsustainable in the past, but looks increasingly sustainable as the Federal Reserve raises rates.

Conclusion

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

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