SENT: 4th Quarter 2022 Portfolio Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/sent.

Portfolio Review

Broad market indices managed to rebound in Q4 2022 and the AdvisorShares Alpha DNA Equity Sentiment ETF (ticker: SENT) participated in the rebound. The S&P 500 Index was up +7.6% in Q4 while the Russell 2000 Index was up +6.2%. SENT was up +4.6% for the quarter. SENT is a 40/60 blend of large cap to mid/small cap in the equity allocation so we frequently compare the SENT performance to a 40/60 blend of S&P 500 and the Russell 2000. SENT’s performance for Q4 represents over 68% capture of the 40/60 blend of these two indices.

As a hedged equity strategy, we regularly track our ‘capture’ ratio of the index because we not only design our portfolio against these indices, but we also hedge using options on these indices. In the hedged equity space, the long term capture of the targeted equity indices is just above 50%. We are not content with our capture for the quarter even though it compares favorably to the industry’s average capture rate. Our goal is to deliver alpha in our equity selection and use that alpha to pay for our downside protection. We keep striving towards that goal.

Let’s assess our alpha and the return on the hedges for Q4 to provide transparency on what is working and what could improve. First, we will focus on the equity allocations. The large cap portion of the portfolio was up just over +9% for the quarter which compares favorably to the +7.6% of the S&P 500. So, we were able to find alpha in the large cap portfolio.

In the mid-small cap equity portion of the portfolio, the returns were just under +9.5% for Q4. This compares very favorably to the Russell 2000 at +6.2% for the quarter. For complete transparency, we can also bring the S&P 400 MidCap Index in to the comparison. The S&P 400 MidCap had a strong quarter as it delivered +10.8%. Meanwhile, the S&P 600 SmallCap Index delivered +9.2% for the quarter. So, while the mid-small cap portion of portfolio for SENT out-performed the Russell 2000 (which we use as a hedge), it was in line with the S&P indices. All in all, it’s a fine quarter for the mid-small cap equity portfolio.

With the equity side delivering returns in excess of +9%, the hedges were obviously a drag in an up-moving market. However, the drag was materially higher than we would typically expect given our target delta on the hedges is around -0.3. Why did the hedges represent a drag on the index slightly over 50% of the index upward performance? The answer lies in the calendar.

SENT was a material out-performer in Q3 2022 and a material portion of that out-performance was in the hedges – particularly the hedges that were owned at the end of the quarter. The Q3 sell off in the markets all bottomed in that last week of September which means the options appreciated to their highest points in that time. Some profits were taken but not all options qualified by our rules to take the profits. So, as the markets marched back upwards in October, the hedges gave back some of the profits. Another way of looking at it is that the options had appreciated to nearly a -0.50 delta but then reversed back to a lower delta when the markets rebounded back upwards. Hence, the higher losses on the hedges relative to the performance of the underlying indices.

Our ten largest contributors to performance in the quarter were dominated by energy companies: Exxon Mobil Corporation (XOM), Impinj Inc Com (PI),Nov Inc (NOV), Nextier Oilfield Solutions Inc (NEX), United Rentals Inc (URI), Lattice Semiconductor Corp (LSCC), Permian Resources Corp A (PR), Schlumberger NV (SLB), Halliburton Co (HAL), and Patterson-UTI Energy Inc (PTEN).

Our ten largest detractors to performance in the quarter were: Gitlab Inc (GTLB), Grid Dynamics Holdings (GDYN), Twist Bioscience Corporation (TWST), RPC Inc (RES), Intercept Pharmaceuticals Inc (ICPT), Crowdstrike Hldgs Inc Cl A (CRWD), Bill.Com Holdings Inc (BILL), Core & Main Inc A (CNM), Carlisle Companies Inc (CSL), and Hashicorp Inc (HCP),

Top Holdings

Ticker Security Description Portfolio Weight %
MNDY MONDAY.COM LTD 1.09%
ITCI INTRA-CELLULAR THERAPIES INC 1.08%
EVBG EVERBRIDGE INC 1.08%
BILL BILL.COM HOLDINGS INC 1.07%
AYX ALTERYX INC – CLASS A 1.06%
IOT SAMSARA INC-CL A 1.06%
HCP HASHICORP INC-CL A 1.05%
XM QUALTRICS INTERNATIONAL-CL A 1.04%
CFLT CONFLUENT INC-CLASS A 1.04%
ZS ZSCALER INC 1.04%

As of 12.31.2022. Cash is not included.

 

Respectfully,

Wayne Ferbert
Alpha DNA
AdvisorShares Alpha DNA Equity Sentiment ETF (SENT) Portfolio Manager

 

Past Commentary

Alpha, one of the most commonly quoted indicators of investment performance, is defined as the excess return on an investment relative to the return on a benchmark index.
Delta is a risk metric that estimates the change in price of a derivative, such as an options contract, given a $1 change in its underlying security. 

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The Sub-Advisor continuously evaluates the Fund’s holdings, purchases and sales with a goal of achieving its investment objective, which is not guaranteed, and judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance. Security prices of small and mid-cap companies may be more volatile than those of larger companies and therefore the Fund’s share price may be more volatile than those of funds that invest a larger percentage of their assets in securities issued by larger-cap companies.  

Options Risk. Selling (writing) and buying options are speculative activities and entail greater than ordinary investment risks. The Fund’s use of put options can lead to losses because of adverse movements in the price or value of the underlying asset, which may be magnified by certain features of the options. When selling a put option, the Fund will receive a premium; however, this premium may not be enough to offset a loss incurred by the Fund if the price of the underlying asset is below the strike price by an amount equal to or greater than the premium. Purchasing of put options involves the payment of premiums, which may adversely affect the Fund’s performance. Purchasing a put option gives the purchaser of the option the right to sell a specified quantity of an underlying asset at a fixed exercise price over a defined period of time. Purchased put options may expire unexercised, resulting in the Fund’s loss of the premium it paid for the option.   

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 to change. The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.