By Rachel Evans
(Bloomberg) --“Leverage” and “retirement” are two words you don’t normally hear together, but that’s exactly the combination one new exchange-traded fund is cooking up.
The Strategy Shares NASDAQ 7 HANDL Index ETF, which is slated to trade under the ticker HNDL, will use derivatives to boost the returns of a portfolio of other ETFs, regulatory filings show.
The idea is simple: With Treasury yields at or near historic lows for almost the past decade, retirees need more income from their investments than the typical 60-40 stock-bond portfolio can generate. This fund takes those vanilla investments, adds a dollop of exposure to racier asset classes that have historically generated higher income, sprinkles in some leverage and, voila, investors get a fund that can support a 7 percent annual distribution rate.
That’s the theory, anyway, according to regulatory filings from the issuer, Strategy Shares, and marketing materials distributed by Nasdaq Inc., which calculates the index. The gauge was created by Bryant Avenue Ventures LLC and the fund will be managed by Rational Advisors Inc., according to documents sent to the U.S. Securities and Exchange Commission. The fund’s registration statement became effective Jan. 12, meaning the ETF could start trading imminently.
“Retirees require high-distribution solutions that minimize the risk of idiosyncratic market dislocations,” Bryant Avenue founders Matthew Patterson and David Cohen wrote in marketing materials titled “A new way to income.” “While investors should be aware that the use of leverage increases the expected return of a given portfolio (assuming the portfolio’s unleveraged expected return is higher than the cost of leverage), it also increases the expected volatility, or risk, of the portfolio.”
The fund’s portfolio is 23 percent leveraged via a total-return swap on a securities-only version of the index it tracks, filings show. Half of the benchmark is allocated to fixed income and equity ETFs -- split 70/30 -- while the other half is dedicated to high-income ETFs including funds focused on dividend equity, covered calls and high-yield debt. The measure rebalances monthly.
All this engineering doesn’t come cheap. The fund has a management fee of 60 basis points per year, with investors also on the line to pay about 36 basis points more in expenses and acquired fund fees, filings show.
To contact the reporter on this story: Rachel Evans in New York at [email protected] To contact the editors responsible for this story: Jeremy Herron at [email protected] Andrew Dunn
