David Cohen is index manager and founder of the Nasdaq 7HANDL Index, a Target Distribution Index consisting of a diversified, multi-asset portfolio of ETFs designed to support a 7 per cent annual distribution rate.
Cohen is an ETF industry veteran having established BulletShares ETFs in 2006, which was eventually acquired by Guggenheim ETFs.
“One of the things I like about ETFs is that they are a package and that means you can exploit the structure for the benefit of investors and deliver a solution,” Cohen says.
One solution developed by Cohen and his business partner Matt Patterson was to create ETFs that acted like bonds, using serial maturity bonds to achieve a target maturity ETF.
“We looked at income or cash flow for retirees or people who need high predictable cash flows, at a time when yields were low. We recognised the need for high income strategies and we looked at closed end funds because they are good deliverers of high distributions. The only problem is that high discount.”
So Cohen and his partner designed something that had the look or same type of economic value to the investor but eliminated the principle of premium/discount volatility which he had estimated contributed 40 per cent of the volatility in a closed end fund.
The ETF fund of funds route allowed them to achieve diversification within the ETF structure. “We understand modern portfolio theory,” Cohen says. “Diversification is the only free lunch in investing. Investors can do better by adding increasing exposure to a diversified pool of investments, rather than higher risk from a concentrated pool.”
The index portfolio was established at 70 per cent fixed income ETFs and 30 per cent equity ETFs, plus gearing of 1.3 times.
“We found that we could achieve 7 per cent distribution and keep up with inflation with smoothed out distribution over 20 years,” Cohen says.
The index, based on the largest and most liquid ETFs, is split into two parts, the core index of large caps and the aggregated bond market and the other half is 12 segments of ETFs designed to provide income.
Fees on the ETF are 0.96 per cent.
7HANDL was launched in January, licensed with Nasdaq and has paid out 7 per cent distribution since launch. It started with USD2.5 million in January and now has USD10 million under management.
“The conversations that are being had are incredibly encouraging,” Cohen says. “We licensed the index to Strategy Shares, a relatively new firm which has grown 300 per cent in term of assets under management since January.”
Strategy Shares has been approaching RIAs and independent advisers and the response has been strong, Cohen says, with people wanting to see how it performs. “But how can it not?” Cohen says.
