HDGE: 2nd Quarter 2023 Portfolio Review
Performance
For the second quarter, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) fell -11.32% (market) while the S&P 500 gained 8.74%.
Markets Review
The rally in equities extended the first quarter’s gains into the second quarter, with a particularly strong May and June. The rally took the S&P 500, Dow Jones Industrial Average (DJIA) and Nasdaq 100 indices nearly to prior highs set in November 2022. At the same time, the movement increased the risk of downside significantly. This is doubly true in the context of rising interest rates. The 10-year treasury bond saw yields rise from 3.4% to over 4% over the course of the quarter.
The chart below shows how the relationship between equity valuation and interest rates has turned strongly against equities. The difference between the S&P 500 earning yield and two-year US treasury yield has fallen below zero (below chart). The last time that was true was in 2002. Note that the current reading is worse for equities than it was during the 2007-2009 period, commonly called the Global Financial Crisis.
The above chart shows the difference between the S&P500 earning yield and two-year US treasury yield. As of July, 7, 2023.
Stepping back, inflation and rising rates have created a convergence across asset classes. The chart below shows how equities, corporate bonds and treasury bills now yield almost the same yields. In effect, an investor could purchase a risk-free T-bill and earn the same yield as investing in riskier corporate bonds or far riskier stock. If this is the case, why would any rational investor choose equities? We believe it is clearly time to hedge.
At the same time, the CNN Business Fear and Greed index is marking extreme greed. The Fear & Greed Index is a combination of seven different indicators spanning momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. A reading above 75 is considered extreme greed and an indication that a downturn is likely.
Source: Lamensdorf Market Timing Letter. As of June 6, 2023.
Looking at the market in more detail, we see that investors are embracing risk. They were less concerned about a recession during the second half of the second quarter than they had been until very recently. Cyclical stocks are outperforming non-cyclicals, bid up by the turn in sentiment.
Source: Two Rivers Analytics, Inc. As of July, 13, 2023.
Another key metric feeding the market rally was investors’ sudden embrace of small-cap stocks. The chart below contains a week of July data. During May and June, small caps were bid up sharply. This “risk-on” signal appears to be rolling over into the early days of July.
Source: Two Rivers Analytics, Inc. As of July, 13, 2023.
Lastly, June marked a return of investors to aggressive industries and a shedding of positions in defensive industries.
Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended. Stocks chosen were based on Two Rivers Analytics’ universe of stocks. © Copyright 2023. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| RUN | SUNRUN INC | -4.08% |
| CACC | CREDIT ACCEPTANCE CORP | -3.73% |
| NOVA | SUNNOVA ENERGY INTERNATIONAL | -3.73% |
| GTLB | GITLAB INC-CL A | -3.12% |
| SYF | SYNCHRONY FINANCIAL | -3.04% |
| CDW | CDW CORP/DE | -2.99% |
| GH | GUARDANT HEALTH INC | -2.92% |
| FIVN | FIVE9 INC | -2.69% |
| SNX | TD SYNNEX CORP | -2.68% |
| BFH | BREAD FINANCIAL HOLDINGS INC | -2.56% |
As of 06.30.2023. Cash not included. Subject to change.
Respectfully,
Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Co-Portfolio Manager
Past Commentary
Definitions:
The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.
A Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
A Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.
The CNN Business Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. The index tracks how much these individual indicators deviate from their averages compared to how much they normally diverge. The index gives each indicator equal weighting in calculating a score from 0 to 100, with 100 representing maximum greediness and 0 signaling maximum fear.
The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indexes.
The Nasdaq 100 Index is a stock index of the 100 largest companies by modified market capitalization trading on Nasdaq exchanges, excluding companies in the financial sector.
A short position is the sale of a borrowed investment with the expectation that it will decline in value.
Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant
to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund may invest in (or short) ETFs, ETNs and ETPs. In addition to the risks associated with such vehicles, investments, or reference assets in the case of ETNs, lack of liquidity can result in its value being more volatile than the underlying portfolio investment. Other Fund risks include market risk, equity risk, short sales and leverage risk, large cap risk, early closing risk, liquidity risk and trading risk. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund. See prospectus for specific risks and details.
Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.
Holdings and allocations are subject to risks and change.
The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.