It's always interesting to me to see how other exchange-traded fund ("ETF") issuers use the ETF wrapper to bring unique strategies to market that don't fit neatly in any particular asset class or style box. One fund that is interesting in that regard is the Strategy Shares Nasdaq 7 Handl™ Index ETF (NASDAQ:HNDL). HNDL is a unique fund-of-funds ETF that aims to deliver a consistent 7% annual distribution rate. It was designed to provide investors with diversified exposure by investing in a collection of other ETFs. HNDL's holdings span across multiple asset classes, including U.S. equities, bonds, and alternative investments. The fund also employs a moderate level of leverage, equal to 23% of the total portfolio, to enhance its potential returns.
The fund's asset allocation strategy is divided into two equally weighted components: a "Core Portfolio" and a "Dorsey Wright Explore Portfolio." The Core Portfolio is composed of a 70% allocation to U.S. aggregate fixed-income ETFs and a 30% allocation to U.S. large-cap equity ETFs. The Explore Portfolio, on the other hand, consists of various U.S. asset categories that have historically provided high levels of income.
Detailed Examination of ETF Holdings
HNDL's portfolio comprises 19 ETFs. Top positions include:
- The iShares Core. U.S. Aggregate Bond ETF - AGG is one of the largest and most liquid bond ETFs in the market. It provides broad exposure to U.S. investment-grade bonds, including government, corporate, and international dollar-denominated bonds.
- The Vanguard Total Bond Market ETF - BND seeks to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, providing diversified exposure to U.S. investment-grade bonds.
- The Invesco QQQ Trust - QQQ tracks the Nasdaq-100 Index, providing exposure to the largest non-financial companies listed on the Nasdaq Stock Market.
- The Alerian MLP ETF - AMLP aims to replicate the performance of the Alerian MLP Infrastructure Index, which includes energy infrastructure Master Limited Partnerships (MLPs).
The current 7.5% exposure to AMLP is interesting given the income MLPs tend to distribute and the exposure to the energy sector more broadly.
Sector Composition and Weightings
HNDL's sector composition reflects its balanced approach towards asset allocation. The fund has a significant allocation towards the U.S. fixed income sector. This includes total bond market funds, high-yield corporate bond funds, and taxable municipal bond funds, among others.
In terms of equity exposure, HNDL is invested across large-cap equities, preferreds, dividend-paying stocks, Real Estate Investment Trusts, and MLPs. The fund also has a sizeable allocation towards alternative assets, including ETFs that provide exposure to covered call strategies and other income-producing assets (JPMorgan Equity Premium Income ETF (JEPI) being notable).
All this has resulted in dividends within a tight range over the past 5 years.
Comparison with Similar ETFs
When compared to other similar ETFs, HNDL's performance and unique strategy stand out. Unlike traditional 60/40 funds, HNDL aims to provide a higher yield through its tactical asset allocation and leverage strategy. For instance, compared to the iShares Core Moderate Allocation ETF (AOM), which follows a more traditional 60/40 allocation strategy, is starting to show some better relative strength on a price ratio basis. This is encouraging in my view as it suggests momentum is potentially early versus more traditional asset allocation approaches.
Moreover, HNDL's annual distribution rate of 7% is notably higher than the yields typically offered by other fixed-income ETFs, making it an attractive option for income-focused investors.
However, it's worth noting that HNDL charges a higher management fee compared to other ETFs. With an expense ratio of 0.96%, investors need to weigh the potential benefits against the higher costs.
Pros and Cons of Investing in HNDL
Pros
- High Monthly Distributions: HNDL's 7% target annual distribution rate is one of the highest among ETFs, making it an attractive option for income-focused investors.
- Diversified Portfolio: The fund provides exposure to a broad range of asset classes, including U.S. equities, bonds, and alternative investments.
- Moderate Leverage: The use of leverage can enhance potential returns, particularly in a rising market.
Cons
- High Management Fees: HNDL's expense ratio is higher than many other ETFs, which could erode returns over time.
- Complexity: The fund's strategy of investing in other ETFs and use of leverage may be difficult for some investors to understand.
- Return of Capital Distributions: Part of HNDL's distributions may consist of a return of capital, which could potentially increase the taxable gain when shares are sold.
Conclusion: To Invest or Not to Invest
Strategy Shares Nasdaq 7 Handl™ Index ETF takes an interesting approach for a fund. Through its diversified portfolio, high distribution rate, and use of leverage, HNDL fits within a satellite portion of an overall asset allocation approach. I think it's worth looking at and considering for those looking to invest in something different that has a unique balanced approach.
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