The table illustrates a hypothetical backtest of index data to demonstrate the effect of allocating 50% of a bond ladder to the 7HANDL Index to blend up distributions.
Blend↑Update
Blending Up a Bond Ladder
In May 2018 we wrote:
Bond Ladders are a staple in client portfolios.
Many financial advisors use bond ladders to meet client cash flow needs and reduce the reinvestment risk associated with rolling over maturing bonds. While a bond ladder can help ensure a steady stream of cash flows throughout the year, low yields on government and investment grade corporate debt unfortunately results in an anemic distribution.
The Nasdaq 7HANDL™ Index was created as a tool for Advisors.
Using HANDLS Indexes, you control the level of distribution just by changing the allocation.
Review
Using index data we can review last year’s hypothesis and see how the blended-up ladder index performed over the period July 2018 through May 2019[1]. Over the most recent 11-month period the 7-year Investment Grade Ladder outperformed the 7-year High yield Ladder. (Data is not annualized).
By blending the Investment Grade and High Yield Ladder 50/50 the distributions increased by 108 bps over the investment grade, while decreasing by 108 bps from the High Yield.
By blending the ladder portfolio with the Nasdaq 7HANDL Index, the estimated distributions can be substantially increased and the total return is increased relative to either of the ladder indexes.
As shown above, a 50% allocation to the 7HANDL increased distributions by 75% for the investment grade ladder and 18% for the high-yield ladder while increasing total return by 12 bps over investment grade and 83bps over the high yield ladder. It should be noted that the performance improvement was not as good (particularly with respect to volatility) as the prior backtest, however, keep in mind in this update, the time period was only 11 months.
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The Nasdaq 7HANDL™ Index is the 7% Income Index. The 7HANDL™ Index consists of a well-diversified, multi-asset portfolio of 19 low-cost ETFs and seeks to offer the potential for high monthly distributions while maintaining a stable net asset value over time. The index is unique in that it is designed to support a 7.0% annual distribution rate in an effort to maintain a steady distribution.
The index provider publishes a net version which incorporates a monthly distribution equal to 1/12th of 7% per month under the ticker symbol NA7HANDLTLE. Because the distribution methodology is transparent and predictable, Financial Advisors can incorporate this information into their planning and target a needed distribution with any kind of strategy.
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