Among other options, retirees can opt to set up annuities to receive a steady stream of cash for the time after they have stopped earning regular income. While annuities are generally considered to be risk-free forms of investment, they do have disadvantages; annuities are seen as largely illiquid, for instance, and they are only as strong as the insurance company or other institution that provides them.
As there are 79 million baby boomers and thousands of them retire every day, there is now more than ever a need for additional options to ensure that these individuals continue to receive regular money for living expenses. A report by investors.com highlights a new exchange-trade fund (ETF) that presents itself as an alternative to annuities and aims to offer a steady 7% annual distribution rate. (For more, see: Annuities vs. Fixed-Income ETFs: Which One Is Better.)
The new ETF is called the Strategy Shares Nasdaq 7HANDL Index ETF, and it offers retirees a solution to the issue of drawing from assets accumulated over a lifetime of investing. HNDL claims to be the first ETF designed to pay investors a consistent monthly distribution. What's more, that distribution aims to be 7% of the fund's asset value by the end of each year. In comparison with other vehicles, 7% is a huge offer; with interest rates at low levels, savings accounts and CDs typically pay 1% or less, while U.S. Treasuries pay 2% to 3%.
HNDL's portfolio manager David Miller explains that "what's unique [about HNDL] is the 7% target distribution. As opposed to just owning a diversified portfolio, investors wouldn't have to go to the effort to sell part of their holdings to generate what they would get from the distributions." (See also: Boomers: Top 4 Safest Investments for Your Portfolio.)
Not a Dividend
Crucially, the distribution that HNDL investors receive is not a dividend but rather a consistent payout that is reliable. Nonetheless, some or all of the distribution may consist of a return of capital, meaning that, if necessary, the distribution could be funded by the capital that investors have paid in. Newfound Research chief investment officer Corey Hoffstein supports the idea behind the fund, saying "it's a unique and novel approach, particularly in a low-yield environment where people have trouble finding sources for distributions." (For more, see: The Best Investment Strategies for a Low-Yield Environment.)
Composition of ETF
HNDL aims for both long-term growth and stability by acting as a fund of funds, holding other ETFs and tracking two indexes in a 50-50 ratio. At this time, the HNDL index is made up of the Core Portfolio and the Dorsey Wright Explore Portfolio. The first of these offers long-term exposure to the U.S. equity and fixed-income markets, with allocations set to 70% bonds and 30% stocks. This portfolio holds the three cheapest aggregate bond ETFs and large-cap blend equity ETFs, as well as the cheapest NASDAQ-100 Index ETF, rebalancing monthly.
The Dorsey Wright Explore Portfolio acts as a tactical allocation index for current income. It is made up of the largest, least expensive and most liquid ETFs across 12 different categories. These categories include preferred dividend stocks, covered calls, growth and income equities, real estate investment trusts (REITs), utility stocks, high-yield bonds, mortgage-backed securities, intermediate-term corporate bonds, dividend equities, active fixed income, master limited partnerships (MLPs) and Build America Bonds (taxable municipal bonds).
Managers of the fund utilize leverage equal to 23% of the portfolio as a means of boosting return. HANDLS (High-Distribution AND Liquid Solutions) Indexes co-founder David Cohen explains that "we don't like to talk about the leverage part, because it upsets people, but leverage can be your friend. Take a low-risk portfolio and leverage it up to a level of risk you're interested in taking, and you have a better overall investment experience."
Bloomberg Intelligence senior ETF analyst Eric Balchunas calls HNDL's 7% yield "really juicy" but adds that "it's pretty expensive, and there's another product that does something similar and pays close to the same yield." HNDL's expense ratio is 0.95%. On the other hand, the First Trust Multi-Asset Diversified Income Index Fund (MDIV) aims for a yield of 6.7% and charges only 0.70%. As more entrants into this corner of the ETF space emerge, it's likely that options will only continue to improve for retiree investors. (For additional reading, check out: How Retirees Should Think About Investing.)