Five months ago I wrote about the then new Strategy Shares NASDAQ 7HANDL Index ETF (HNDL). The fund aims to deliver a steady monthly payout that annualizes out at 7%. It's not yield necessarily as some portion will be a return of capital. It certainly is an interesting idea which is why I wanted to revisit it again. When I first wrote about it I said;
A lot of closed end funds have the tendency to go from the upper left to the lower right, as Dennis Gartman might say, so I will be curious to see whether HNDL can avoid that chart pattern, it is not clear to me that it can.
Here is a chart by way of ETF.com;
I should be clear, it is an ETF it is not a closed end fund but like closed end funds, HNDL uses leverage and seeks that steady "dividend." Sure enough, the price has moved from the upper left to the lower right ever so slightly. On a total return basis though, so including the payout, ETF.com reports the return has been positive.
As a quick reminder on the holdings it holds several funds that track the Barclays Aggregate Bond Index which has a yield in the high twos. It also has exposure to high yield (not very interest rate sensitive), preferred stocks (very interest rate sensitive) and some more niche exposures like MLPs and covered call funds. It's a multi asset fund so there is also equity exposure which could provide a decent chunk of the overall 7% needed. As I mentioned in the previous post on this fund, had it existed last year, the growth in its equity allocation could have covered 600 basis points out of the 700 it seeks to pay.
When I wrote that last post about the fund I wasn't sure how it could be used and I have since thought of a way but it could be psychologically difficult. In retirement oriented posts I've talked about the sequence of accounts from which you should draw money out for maximum tax efficiency. While there are many thoughts about what is the most tax efficient, I believe that drawing from a taxable account first, even if that means drawing it down to zero (that's the psychologically difficult part), will quite often be the best path to take.
Investors tend to have less money in their taxable account than their various tax qualified accounts (401k, IRA, Roth and so on). A plausible scenario is that someone retires at 62 with $200,000 in a taxable account and with a larger sum, let's say $700,000, in their tax qualified accounts. Without more detail than that, a plan to deplete that $200,000 over six or seven years, allowing the $700,000 and Social Security to each continue to grow is worth considering. In this scenario, should you plunk the whole $200,000 into HNDL versus just leaving it in cash and spending it, or putting it in T-bills and getting two point whatever percent? Again, the premise is you expect to deplete this bucket of money.
Regardless of how you get there, if you can make the $200,000 last that long, six or seven years, your tax deferred account cold grow considerably. In the previous six years from today, the S&P 500 is up about 103% on a price basis. If your sequence of returns is lucky enough to give you half that, then a 60/40 portfolio could grow by 30%, maybe a little less depending on how you rebalance. So you've essentially replaced the $200,000 you've just depleted and your Social Security has increased by 8% for every year you delayed taking it. Now with Social Security and $900,000, you might be withdrawing a much smaller amount to live on because of the Social Security.
Using HNDL instead of T-bills in your taxable account could be the difference maker between that sixth and seventh year, again, depending on the sequence of returns. Embedded in this idea is that at 7%, HNDL might erode to a very low price. Take the time to look at some older closed end funds that seek to offer a high payout. Again HNDL is an ETF but there are similarities to closed end funds. Where the retirement strategy is expected depletion of this bucket of money, the erosion of HNDL's price would not be bad necessarily, the question is would HNDL at 7% be able to last longer than having the account invested in T-bills. The answer is unknowable based on all sorts of things but it is a plausible outcome that it works as suggested.
I would not expect HNDL to be immune to a bear market. If I owned HNDL and I thought the S&P 500 was rolling over into a bear market (breach of the 200 DMA, 2% rule) I would sell the fund and in the context of this article, I would take the two point whatever percent I could get in T-bills.
Realistically, I would not put the entire $200,000 into one fund but I do like the strategy where the expectation is that account will be depleted but where we are in the market cycle matters and if you're timing isn't lucky then you need to accept a far more conservative allocation. I can appreciate how difficult it might be to deplete an account but there are circumstances where it will be the most efficient route, and if that is true or will be true of your circumstance then you need to at least consider it.