Can A 7% Yield Be Sustainable?

Yesterday I mentioned the NASDAQ 7HANDL Index ETF (HNDL) and that I wanted to take a closer look at it in a separate post. The fund launched in early 2018, I heard about the fund from someone I knew from Claymore ETFs, a name that is long gone, and was then involved in HNDL. I was skeptical that the fund could maintain its objective of a 7% payout without eroding considerably. Almost 7 years in and the fund has been paying 6-7% for the most part but the erosion is not considerable. 

It did get hit in 2022 so it might be fair to say it chugs along most of the time without the expectation of crisis alpha. It did snapback after the 2020 Pandemic Crash, that dip was smaller than the broad market.

The portfolio underlying the fund is pretty interesting if you strip out the 7% income stream which includes returns of capital (ROC). As I said yesterday, ROC is not necessarily a bad thing for tax reasons and for addressing the front burner issue of creating an income stream, realizing that there very well could be long term NAV erosion.

I built out the following that does not reinvest the dividends.

Portfolio 1 is the ETF itself. Portfolio 2 copies the holdings with a couple of tweaks to be able to backtest longer, for example instead of QQQM I used QQQ which both track the same thing. Portfolio 3 is just as it says, I removed the duration which was quite a few funds in favor of a floating rate fund with essentially no volatility. In removing the duration, I removed the volatility as opposed to trying to make a call on interest rates, the idea is just to reduce the volatility which obviously I did. 

HNDL has a similar standard deviation as the iShares 10-20 Year Treasury ETF (TLH) and about twice the standard deviation of aggregate bond ETFs. The floating rate fund has a standard deviation of 0.59% which is nothing as I said. 

HNDL's payout has been lumpier than I realized but interestingly, Portfolio 2's income appears to have been steadier than the ETF. Portfolio 3 probably has not been as steady but it's been ok. In seven full and partial years, HNDL increased in price in five years with two years of decline including a 20% drop in 2022. That obviously nets out to a slightly negative CAGR. Could you live with that from some sort of income bucket. Portfolio 2 has yielded between 3-4% every year. Is that worth it for a CAGR, after dividends, of just under 5%. What about Portfolio 3? That certainly has not provided equity-like returns but it has been decent.

HNDL has been in the same ballpark, performance wise without reinvesting the dividends as AGG and TLH and you can see the volatility profiles are consistent with what I mentioned above. Would HNDL or something else like it be useful for you? There is not single right or wrong answer. I'm not interested in using the fund but it has clearly done better than I would have expected.

There are also some interesting things in the holdings if you want to click through and look. It has a mid single-digit weighting to the JP Morgan Equity Income ETF (JEPI) which is kind of inline with what we talk about here, small weightings to these things not 30% or whatever. It also has about 7% in the WisdomTree US Efficient Core ETF (NTSX) which might be better known as the 90/60 fund. NTSX leverages up such that a 67% weight equals 100% in VBAIX leaving 33% to just earn extra interest on the cash, can be put into diversifiers to create a better risk adjusted result, go hell bent for alpha or some combo of the three. The small weighting to NTSX has the effect of leveraging up HNDL by about 3%. That is far from misusing leverage which so often leads to ruin. Maybe the exposure to NTSX helps or maybe it hurts, but that is not potentially ruinous leverage. 

The fund has been somewhat successful even if not optimal but it is useful to see someone else finding a practical use for covered call (derivative income) and capital efficient funds to help tie up a lot of the concepts we explore here. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.