SENT: 2nd Quarter 2021 Portfolio Manager 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

Q2 2021 is the first full calendar quarter for the AdvisorShares Alpha DNA Equity Sentiment ETF (SENT). Our launch in Q1 was a blast and we look forward to many more quarters of delivering for our investors.

Since we did just launch in Q1, let’s kick off this Quarterly review with a reminder of our approach. SENT is a Hedged Equity strategy that strives to deliver capital appreciation and downside protection.  We combine an all-cap US equity portfolio based on proprietary research that strives to outperform the market while complementing it with a delta hedging program that is intended to protect the portfolio during market downturns.

Our equity portfolio is designed to identify companies growing faster than Wall Street expectations. Our belief is that this approach will reliably produce excess returns over short and long time periods. The delta hedging portfolio utilizes index put options to protect the downside of the portfolio in the event of a material market decline. The hedges are reset regularly to ensure they are providing sufficient protection. It is important to note that the hedges are meant to help offset losses in a material market decline and not a ‘garden variety’ small market decline.

In the following, we will provide specific commentary on our research performance, our equity performance contributions, and our hedging program.

RESEARCH PERFORMANCE

Our core research function is built to identify revenue and earnings per share (EPS) performance that is greater than Wall Street expectations which we refer to as hidden demand. We measure our success in finding hidden demand by analyzing two key metrics: earnings surprises and analyst upgrades. We had a strong quarter in both of these categories.

In April and May, we had 58 portfolio companies report Q1 2021 earnings. 56 of those 58 companies had a surprise to the upside on EPS expectations (compared to FactSet expectations on earnings day). This is a 96% beat rate on EPS which is very strong and better than the S&P500 average for the quarter by 10 basis points (source: FactSet).

For revenue expectations, we had 96% of our reporting companies either beat or meet their revenue expectations. This was also much better than the market results and stronger than we have typical seen in our experience running this strategy prior to the ETF launch.

Lastly, at the earnings event, these companies also provide forward guidance to investors on EPS and/or revenue. Of the 58 companies, we had 33 provide upward guidance and only 6 provide downward guidance in their earnings announcement. In our experience, a 5:1 ratio of upward-to-downward guidance is a strong outcome that we hope to see continue.

While earnings in April/May were strong, we are nearing the next earnings season and the analysts begin the cycle all over again. We expect to see analysts begin to “catch up” and recognize the potential in the companies held in SENT’s portfolio. This will typically manifest itself in analyst upgrades to EPS and revenue expectations. In June alone, there were over 1,000 changes made to analysts revenue and/or EPS projections (as reported to FactSet). For the companies in SENT’s portfolio, over 95% of the analyst changes were UPGRADES to EPS or revenue expectations. This is well over the 50% average typically seen for all 3,000 stocks held in the Russell 3000 Index – SENT’s potential investment universe.

EQUITY PERFORMANCE

For the quarter that finished on June 30, 2021, SENT’s large cap allocation led the portfolio’s performance on an absolute basis which is consistent with the equity returns of the markets. But SENT’s mid-small cap allocation performed better when compared to its peer group, like the Russell 2000 Index.

The large cap indices, like the S&P 500, out-performed the smaller Russell 2000 Index and the S&P 400 Mid Cap Index. Our large cap equity allocation delivered returns of just over 10% for the quarter which compares favorably to the S&P 500 returns for the quarter of +8.55%. Our Mid-Small cap equity allocation delivered returns over +9% for the quarter. The Russell 2000 delivered +4.29% for the quarter so this compares very favorably for our portfolio.

Our goal is always to deliver out-performance in the equity side to fund the cost of the hedge. Certainly the out-performance of the Mid-Small cap allocation was more than adequate to fund the cost of the hedge.

HEDGE PORTFOLIO

Speaking of the hedge, the hedges were more expensive than we typically expect in any 3-month time period. This was driven by some temporary increases in volatility that were short lived but caused the cost of hedging to increase slightly with no realized profits from any actual material decline in the markets.

Our equity portfolio delivered returns around +9.5% for the quarter but the drag of the hedges was around -2.6% on a notional basis. Given that we are allocated 60% to Mid-Small Cap and 40% to Large Cap, we’d expect a blended equity return of those around 6% for the equity only portion (ie, 60% invested in Russell 2000 and 40% invested in S&P 500). After factoring in the cost of the hedge, you’d expect returns under 5% for the quarter. But SENT delivered returns of +6.7% (market) after the cost of our hedge.

We will always be happy with those kind of outcomes!

Top Holdings

Ticker Security Description Portfolio Weight %
AMD ADVANCED MICRO DEVICES 1.15%
ROKU ROKU INC 1.11%
VSTO VISTA OUTDOOR INC 1.11%
URBN URBAN OUTFITTERS INC 1.10%
BC BRUNSWICK CORP 1.10%
EAT BRINKER INTERNATIONAL INC 1.09%
ANF ABERCROMBIE & FITCH CO-CL A 1.09%
ABNB AIRBNB INC-CLASS A 1.09%
TPR TAPESTRY INC 1.09%
AMN AMN HEALTHCARE SERVICES INC 1.09%

As of 06.30.2021. Cash is not included.

Respectfully,

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

 

Past Commentary

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.

Investing involves risk including possible loss of principal. 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.