In the exchange-traded-funds industry, it’s not a stretch to say that issuers find solutions for many problems. That could be the positioning of the newly minted SoFi Weekly Income ETF (NYSEARCA:TGIF). The TGIF ETF debuted on Oct. 1, and its timing could be auspicious.
That’s because the new fund comes to market at a time when U.S. interest rates are at historic lows, making income harder to come by in the bond market. Additionally, a massive amount of S&P 500 member firms pared or suspended their dividends in the first half of the year, due to their reduced cash amid the novel-coronavirus pandemic.
In other words, generating income is getting harder to do in 2020, and TGIF fills a unique void by promising weekly distributions. Although there are some monthly dividend stocks and equity-based ETFs on the market, while bond funds deliver monthly distributions, no ETFs had made weekly payouts prior to TGIF’s arrival.
Weekly Payouts Don’t Look Like a Gimmick
Actively managed, the TGIF ETF aims to deliver distributions every Friday. I don’t believe this is a gimmick by its issuer, SoFi or by Income Research + Management, the 30-year-old old bond firm that manages the new fund.
The firms know what the rest of the world knows: The S&P 500 yields just 1.66% while the comparable metric on 10-year Treasuries is a tiny 0.77%.
TGIF generates income by holding corporate bonds, both investment-grade and high-yield fare. As a result, credit risk is in play, and that’s something to consider in the current climate. In March alone, $400 billion worth of investment-grade corporate debt was downgraded one level by at least one of the three major ratings agencies.
In the second quarter, S&P Global Ratings trimmed its ratings on a record 414 long-term issuers . Moreover, the downgrades of speculative debt, i.e. bonds with ratings of BB+ and lower – surged.
Due to the fact that it’s new on the scene, the composition and credit quality of TGIF aren’t yet posted on the SoFi web site. But a look at the fund’s roster indicates that the ETF has substantial exposure to the energy sector. Further, it also holds debt issued by companies in other industries that have been punished by Covid-19.
In other words, there’s likely a fair amount of junk bonds in its portfolio, meaning TGIF isn’t a free lunch, particularly if default rates remain elevated.
Conversely, TGIF does offer investors reduced interest-rate risk because it focuses on bonds with durations of three years or less. Duration affects a bond’s sensitivity to changes in interest rates, and longer-dated debt is more sensitive than short-term fare.
Assessing the Utility of the TGIF ETF
The first ETF in U.S. history is almost three decades old, and many if not all of the most basic investment concepts are addressed by ETFs. That means new ETFs are likely to be increasingly nuanced, refined and unique.
That also places makes it harder for investors to determine which new funds work for them. When it comes to TGIF, I like the explanation offered up by Ben Johnson, Morningstar’s global director of ETF research.
He tells investors to assume that TGIF will yield 5% and then subtract its annual fee of 0.59%, for a yield of 4.41%. Throw $10,000 into the new ETF and, assuming a 10% tax rate, an investor is generating $7.63 per week. That’s almost $400 per year.
That’s not too shabby. But assuming that Johnson’s math proves accurate and the income delivered by TGIF every week is equivalent to the cost of 1.5 cups of expensive coffee, the new ETF may wind up being more suitable for younger investors with lengthy time horizons than those needing high levels of income right now.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.