Inventing new products to solve difficult financial problems has been a mainstay of the mutual fund industry. In the 1990s, the fund industry introduced target-date retirement funds. That was followed by the launch of target-maturity bond funds that customize a person’s fixed-income exposure to a defined year.
By extension, the exchange-traded fund industry has done plenty of innovating itself. And the latest twist could someday rival the popularity of previous inventions: targeted distribution funds.
Sometimes referred to as “managed payout funds,” targeted distribution funds aim to deliver lifetime income payments via a minimum distribution amount. Certain funds offer a specified monthly payout while others deliver variable payments based upon fund performance. Let’s examine ETFs that follow this strategy.
Aiming For A 7% Distribution
Launched in January 2018, the Strategy Shares Nasdaq 7HANDL Index ETF (HNDL) bills itself as the first ETF designed to produce a targeted distribution. According to fund literature, HNDL’s goal is an annual 7% distribution rate. Distributions occur monthly and some of the payouts will be a mix of dividends, capital gains and a return of investor’s principal.
HNDL’s underlying index is split evenly between a core portfolio and another portfolio called the Dorsey Wright Explore Portfolio. Both portfolios use ETFs as their main investment vehicles.
The core portfolio has a 70% allocation to U.S. aggregate bond ETFs while 30% is allocated to U.S. large-cap stock ETFs. The Dorsey Wright portfolio is spread across ETFs covering various asset classes but it leans toward high-income generating categories. HNDL juices its distribution by adding leverage in the amount of 23% of the overall portfolio. The fund charges net annual expenses of 0.95%.
Shooting For 5%
Like HNDL, the Global X TargetIncome 5 ETF (TFIV) targets a fixed distribution payout. But it does so less aggressively by shooting for an annualized yield of 5%, net of fees.
The bulk of TFIV’s underlying investments are committed to preferred securities (20.1%), high-yield bonds (19.9%) and senior loans (19.5%). To obtain its market exposure to these areas, the fund uses ETFs, some of which include Global X’s own funds including the Global X U.S. Preferred ETF (PFFD) and the Global X SuperDividend ETF (SDIV).