TGIF: Newly Launched Weekly Dividend Fund (NYSEARCA:TGIF)


Written by Nick Ackerman, co-produced by Stanford Chemist

SoFi Weekly Income ETF (NYSEARCA:TGIF) was very recently launched at the start of October of this year. They have the ambitious goal of trying to provide weekly dividends for investors. The ticker symbol is a nice touch on the saying “thank God it’s Friday.” Besides, what’s better than receiving dividend income quarterly or monthly? The greater the frequency of a dividend means an investor can compound slightly faster and invest in investments that provide regular income in retirement.

SoFi is a newer financial company that a lot of investors may not be familiar with yet. They have just begun to offer ETFs between 2019 and 2020. TGIF is their latest entry into the competitive space, launching on October 1st, 2020. SoFi itself was founded in August of 2011. They originally were, and still operate, as a peer to peer lending platform. With the launch of these ETFs, they are continuing on their branching out as a financial services company.

(Source)

About The Fund

TGIF seeks to “provide weekly income by investing in investment-grade and high-yield fixed-income securities.” They describe the fund as: “the first-ever ETF that seeks to distribute income on a weekly basis.” Targeting a portfolio that provides “exposure to over 30 bonds across multiple industries and capital structures.” They also target a low duration of “less than 3 years, with the goal to reduce interest rate risk relative to longer-dated bonds.”

Investing across the spectrum of credit quality allows the investment manager the flexibility to invest where they see fit. The lower duration of their portfolio will also provide greater stability for investors.

Another area where this ETF is different is that they are actively managed by Income Research + Management. This is a growing popular trend of actively-managed ETFs.

IR+M, as they refer to themselves, is a “privately-owned, independent, fixed income investment management firm that serves institutional and private clients.” They mention, “Our investment philosophy and process are based on our belief that careful security selection and active risk management provide superior results over the long-term. By combining the capacity and technology of a larger firm with the culture and nimbleness of a boutique firm.”

They were founded in 1987. That gives them plenty of experience in the field. That does seem like a positive that they were able to partner with SoFi for TGIF.

The expense ratio of the fund is 0.59%. It appears to be quite a small fund currently, with NAV just shy of $7.5 million. Like many niche funds, the volume can be rather low on these smaller funds. Lower trading volume will increase the risks of owning this fund. It has only been on the market for a short amount of time, but Yahoo Finance puts volume at 68,019. This might be inflated just based on the excitement around the launch. If it becomes more of a popular concept, the volume could really take off. Though I believe average volume may fall from these levels based on managed assets alone.

Dividend – “Get Paid On Friday*”

One of the asterisks that they provide for further disclosure is on the main attraction of the fund itself – the weekly dividend. The disclosure is this; “the fund intends to pay out dividends and interest income, if any, weekly. There is no guarantee these payouts will be made.”

This confirms one of the first things I thought of the fund as an ETF. In the ETF wrapper, traditionally, they will only pay out the income received and pass that on to investors. On the other hand, closed-end funds pay out “managed” rates that are level and can be sourced from income, gains or return of capital.

Essentially, if the fund doesn’t receive any income itself, then it won’t have anything to pay to investors. This is likely to be the case on many weeks as the fund holds 35 positions currently. The typical bond pays interest only twice a year, in fact. Of course, the payment dates are all different and TGIF can buy positions to stagger out payments. It still seems rather unlikely that they are able to collect interest payments every single week based on only 35 positions. If they bump this up considerably, then it might be more achievable. I also hope they are not investing in investments just based on hitting the weekly dividend target – but rather, the merits of the underlying investment itself.

So far, they have been able to deliver on this weekly payment.

(Source – Dividend Investor)

One way that they may be able to meet this weekly payment objective, is by deferring or paying out only a portion of what the ETF is receiving in interest payments.

Holdings – Well-Diversified On Launch

Since they have just recently launched, it is likely they don’t have a fully fleshed-out portfolio yet. Though they are only reporting 9.82% in cash as of launch day, so they have been putting assets to work. Several of their top ten include names that I would believe are recognizable by a lot of investors. Additionally, they seem to provide diversification across several sectors right out of the gate.

(Source – Fact Sheet)

Based on the top ten holdings, we can calculate or estimate what the fund could potentially be yielding. This would only be a crude estimate in that the top positions only include 28.82% of the portfolio, excluding cash. They provide their full list of holdings on their website if one wanted to go line by line to find an even closer estimate.

Based on those nine positions, excluding the cash, and extrapolating out gives us an average yield that should be around 5%. This seems rather appropriate as the high-yield fund iShares iBoxx High Yield Corporate Bond Fund (HYG) is showing a yield of 5.32%. Putting those two items together does lead me to believe that TGIF is primarily going to be comprised of high-yield investments. Though having the flexibility to invest in investment-grade quality doesn’t hurt the prospects for the fund.

To further reinforce this notion, we can take a look at these bonds as they provide the CUSIP. This allows us to find the rating if one is available.

Ford Motor’s (F) 8.5% yielding is below investment grade. As some investors know, F has only recently joined this list earlier in 2020. In other words, this is a fallen angel. The credit rates are Ba2 for Moody’s (MCO) and S&P (SPGI) is BB+.

Aviation Capital’s position is investment grade, Moody’s rates it Baa2 and S&P has it at BBB-. This is right on the edge of investment grade, but nonetheless, still counts as investment-grade.

Teva Pharmaceutical (TEVA) is also giving us a junk credit rating of Ba2 and BB-.

TerraForm Power (TERP) was merged with Brookfield Renewable Partners (BEP) only a few months ago. However, their bond offering is also rated below investment grade at Ba3 and BB-.

Owl Rock Capital (ORCC) is considered investment grade with ratings of Baa3 and BBB-. This is a BDC, which is still maintaining its investment-grade rating on this debt – even while the pandemic impacts its underlying investments considerably.

NortonLifelock (NLOK) is junk-rated at Ba3 and BB-.

Newmark (NMRK) is only rated by S&P, with a below-investment-grade of BB+. This is another company that has been struggling particularly hard due to the pandemic. They operate in the commercial real estate business.

Wyndham (WYND) is junk-rated at Ba3 and BB-. As the hotel and resort business has been under incredible pressure, WYND is certainly on the riskier side.

Finally, On Semiconductor (ON) is rated as junk as well, showing ratings of Ba2 and BB.

That leaves Aviation Capital and Owl Rock Capital as the only investment-grade positions in TGIF’s top ten. I do believe that is more evidence of the portfolio going to be investing heavier in high-yield bonds.

Conclusion

The goal for the fund to pay a weekly dividend is certainly an ambitious one. My original thoughts are that they will struggle to achieve this every single week of the year. Though the concept is possibly one of the most interesting for income investors. Being able to collect 52 dividend payments a year certainly seems better than quarterly or monthly dividends.

Overall, the fund is too new for most investors to invest in at this time. I would feel more comfortable investing with more time passing as well. As an actively managed ETF, we will need to look for more of a track record, as we do with CEFs. That being said, the concept is interesting enough to put it on my watch list. It will also be interesting to see if we have any more of these launch on the back of TGIF coming to the market. Of course, what should be even more important is the underlying holdings in the portfolio, not just when the investment pays a dividend. In the case of TGIF, one would need to be comfortable with a portfolio primarily on high-yield investments. One would also need to be comfortable with a low amount of assets currently.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally published for members of the CEF/ETF Income Laboratory on October 7th, 2020.

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