With bond yields long stuck in the mud of low rates, investors seeking yield have had to think differently in order to get sufficient income. In early 2018, Strategy Shares rolled out the Strategy Shares Nasdaq 7HANDL Index ETF (HNDL) as a way to deliver sizable yield with a 30/70 (or 70/30, depending on what’s being emphasized) portfolio consisting of bonds, stocks and alternative assets, along with “modest” leverage.
The fund was designed as an alternative to the traditional portfolio composed of 60% stocks and 40% bonds.
“A big problem with a 60/40 model is that if you’re 60% equities and you run into a year like 2008 when equities get slammed, and equities are twice as volatile as bonds, from a risk allocation standpoint you have more than 80% equity risk,” said David Miller, co-founder, chief investment officer and senior portfolio manager at Catalyst Capital Advisors LLC, sponsor of the two Strategy Shares ETFs (a third ETF is expected to launch later this spring).
“What we’ve found historically is that you get the best risk-adjusted returns from a portfolio with an equal balance of bonds and equites, and we found that results in a 70/30 allocation with 30% in U.S. large-cap equities and 70% with the Bloomberg Barclays U.S. Agg Index.”
The HNDL fund tracks an index developed by Bryant Avenue Ventures in partnership with Nasdaq and Dorsey Wright, and its portfolio consists of ETFs that are split into two categories. The first is a core portfolio comprising a 70% allocation to U.S. aggregate fixed-income ETFs and a 30% allocation to U.S. large-cap equity ETFs.
The second is a Dorsey Wright Explore Portfolio with a tactical allocation to ETFs in various U.S. asset categories that typically produce high income levels.
In total, the index contains 19 ETFs representing an estimated 20,000 individual underlying securities. The Dorsey Wright portion includes alternative investment categories including covered calls and master limited partnerships.
In addition, the fund employs leverage in an amount equaling 23% of the total portfolio as a way to boost the fund’s returns. It does this through a total-return swap with BNP Paribas.
Miller noted that BNP Paribas, a France-based international banking group that’s one of the world’s largest banks, is able to borrow at below Libor rates and provide very low borrowing costs on its leveraged assets.
“We’re trying to have a 30/70 portfolio that’s more balanced but still able to deliver a comparable return to what a 60/40 portfolio could with better risk-adjusted returns," he explained. "And you need leverage to do that; it lets us add the additional bond exposure to hedge out your equity exposure."