VEGA: 4th Quarter 2020 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/vega.

Portfolio Update

  December 2020 YTD
VEGA NAV 2.67% 7.76%
MSCI AC World Index 4.64% 16.25%
Cboe S&P 500 Buy Write Index (BXM) 1.77% -2.75%
Bloomberg Barclays U.S. Aggregate Bond Index (AGG) 0.14% 7.51%

As of 12.31.2020.

The last quarter of 2020 was much different from the first quarter. The market continued to make new highs into late December, which resulted in a good year of performance for most asset classes. This astonishing rebound from March lows was unexpected by many given the dramatic impact COVID-19 had on the world.

Winners

The best performing sector in 2020 was Technology. The VEGA strategy held Technology Select Sector SPDR Fund (XLK) at the start of 2020 and continued to hold it through the entire year. There was some nicely timed rebalancing to take gains off the table in mid-February and again in September. At the end of October,  XLK dropped in value and VEGA took advantage of the lower price by adding to its existing position.

 Laggards

The story of the year really goes to the Equity rally. VEGA’s holding in Fixed Income did not perform poorly per se but compared to the phenomenal equity performance especially in the later part of 2020, Fixed Income could not hold a candle to Equity.

Top Holdings

Ticker Security Description Portfolio Weight %
SPY SPDR S&P 500 ETF TRUST 51.40%
  BLACKROCK LIQUIDITY T 60 6.92%
EFA ISHARES MSCI EAFE ETF 5.53%
XLV HEALTH CARE SELECT SECTOR 5.00%
XLK TECHNOLOGY SELECT SECT SPDR 4.08%
XLC COMM SERV SELECT SECTOR SPDR 4.07%
XLP CONSUMER STAPLES SPDR 3.45%
IGSB ISHARES 1-5Y INV GRADE CORP 3.42%
MINT PIMCO ENHANCED SHORT MATURIT 3.37%
AGG ISHARES CORE U.S. AGGREGATE 3.36%

As of 12.31.2020.

Activity

Covered Calls:  With August flat and September down in terms of underlying versus the strike, it seemed fitting that December should be up compared to the underlying. By mid-December, just days ahead of expiration, SPY was trading at 350, which did not compare favorably to the strike price which was set at 345, making the Covered Calls $5 In the Money. When the calls were originally set in September, the price of SPY was around 326. From a risk perspective, the SPY calls were very conservative at the time of opening. The delta, or chance of assignment, was 0.11 (11%) and the Out of the Moneyness was 5.8%. This was a fancy way of saying that there was an 11% chance SPY would rise more than 5.8% in a month’s time. Unfortunately, even with the odds in VEGA’s favor, the Covered Calls for December were In the Money before expiration. This meant that VEGA needed to close the calls or risk assignment, which has tax consequences. VEGA closed its calls the Wednesday before expiration for a little less than a $5 loss, which makes intuitive sense. When the Covered Call is set, the strategy can participate in price appreciation up to the strike, but no more. This means VEGA participated from $326 up to $345, or $19. The $5 difference between $345 and $350 was neutralized by the Covered Call, meaning the underlying appreciated by $5 and the Covered Call depreciated by $5. In addition, the Covered Calls were not sold against 100% of the underlying, only 60%, which equates to only $3 (60% x $5) of the overall position was not recognized from gain from $345 to $350. All things considered, VEGA participated in $21 of $24 price appreciation or 87.50%.

New Covered Calls were established in the portfolio that were 7.5% Out of the Money and had a delta of .13. The new Covered Calls are the SPY November 20, 2020 $370.

Protective Puts:  Protective Puts looked like a good addition to the portfolio, particularly in late December when the market started to sell off with some gusto. During the down draft of SPY, the Protective Puts held by VEGA, SPY Dec 18 $250 Puts, reached a recent high of about $2.20. This was a considerably large jump, because just 7 days previous, the price of the Protective Puts was $0.68. However, given that the VEGA strategy wanted to keep the Protective Puts through the duration of the U.S. Presidential election, the choice was made to maintain the Protective Puts and not sell at $2.20. As of this writing, the Protective Puts cover approximately 10% of the notional value of the portfolio. VEGA will look to sell the Protective Puts should the market experience significant volatility post-election.

Tactical Shifts:  Normally, VEGA discusses Tactical Shifts after Volatility-Based Reinvestment in these written pieces. However, this month the Tactical Shift directly relates to the Volatility-Based Reinvestment. Back in the midst of the Coronavirus Crash, VEGA had done several Volatility-Based Reinvestments, putting money back to work at ever lower prices. Those reinvestments into the market had been allowed to appreciate from March through mid-December 2020. When the Covered Calls went In the Money in mid-December, in conjunction with closing the Covered Calls, VEGA rebalanced SPY and XLK back to their target weights of 50% and 3.5%, respectively. This allowed VEGA to return 3.90% to cash, bringing the cash position up to 8.2%.

Volatility-Based Reinvestment (VBR):  There had not been a Volatility-Based Reinvestment since March 2020. Going into December, the VIX (Volatility Index) needed a reading of at least 60 before deploying VEGA’s cash. However, after the Tactical Shift to return gains to cash and increase the cash position, VEGA was able to reset the VBR threshold to be 25% over the 200-day moving average, which is down dramatically from 100%.  The 200-day moving average of the VIX going into December was 29.51 and would have needed a VIX of 60 prior to the Tactical Shift. After the Tactical Shift, the VIX threshold dropped to 36.90. On December 28, 2020, the VIX jumped up to over 40, which activated a Volatility-Based Reinvestment. Of the almost 4% put into cash just weeks prior, 1% of the portfolio was reinvested and put back to work. The purchase was split equally into SPY and XLK.

Beta:  As of December 20th, 2020, prior to the Volatility-Based Reinvestment the beta of the portfolio was established to be approximately .63 compared to the SPY. This is inline with the long-term target beta of 0.60. This is down from 0.67 in September and most of the drawback was from the sell of SPY and XLK earlier in the month of December.

Fixed Income:  Fixed Income continues to maintain a relatively low duration of 2.31, which is up slightly due to the changes in the underlying Fixed Income ETFs. VEGA continues to think that low duration is prudent given the market environment. Should more volatility return in early 2021, principle values of high duration Fixed Income positions will be impacted more than their lower duration counterparts.

Market Review

The calendar year of 2020 has come to an end, so let us start by wishing everyone a Happy New Year!


Source: MassMutual Funds; Monthly Marketing Recap, January 2021

While the S&P 500 was down 34% at one point this year, the index finished the year up 18.40%. December helped the index finish the year off strong posting a gain of 3.84%. The Dow Jones Industrial Average (DJIA) finished the month up 3.41% and was nearly up double digits on the year at 9.72%. The technology heavy NASDAQ led the way in the new social distancing type of economy. The NASDAQ finished the year up 44.92% after increasing 5.71% in the month of December.

While the year ended on a positive note for the markets, it was not without many bumps along the way. The image below shows the intra-year declines of the S&P 500 represented by the red dots. The gray/black bars showcase the final year end performance.


Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2020, over which time period the average annual return was 9.0%. J.P Morgan – Guide to the Markets – U.S. Data are as of December 31, 2020.

 2020 Recap

One of the more frequent questions that we received to start 2020 was, “Why didn’t my portfolio keep up with the S&P 500?” The answer was simple. If you want to achieve higher returns, you must be willing to take on a larger amount of risk. It is imperative that you have the correct expectations for your portfolio moving forward. Conversations earlier in the year made it easier to explain the ebbs and flows of the year that followed. Fast forward three months and many investors were ecstatic that their portfolio didn’t fall over 30% like the S&P 500. Fast forward nine more months and the S&P 500 finished the year up over 18%. It is very difficult to predict the short-term movements of the stock market, but what we can do is help to set expectations. Specifically, how a portfolio will react to given circumstances. By having a dynamic financial plan, we can take advantage of rebalancing during the large market swings to put ourselves in a better position moving forward.

A lot contributed to the large market movements and swings in 2020. So, we thought we’d briefly recap some things that feel like they occurred much longer than just a few months ago.

In January, we discussed the forthcoming Brexit at the end of the month, and geopolitical tensions between the United States and two nations. With China, we had the trade war. Phase One was ultimately signed in January. The month also saw heightened tensions between the United States and Iran with a U.S. drone strike killing an Iranian major general. The beginning of February saw those in the United States beginning to discuss Covid-19 and by the end of the month, the pandemic had begun. On Tuesday, March 3rd, the Fed decided to lower interest rates, the first emergency rate move since the depths of the Financial Crisis. March also saw the S&P 500 enter bear market territory as it fell 12.5% during the month. The pandemic was in full swing as nationwide lockdowns began.

We always say that it isn’t about timing the market, but it is about time in the market, and that rang true in April as the S&P 500 rebounded with its best month since 1987. The index finished April up 12.7%. While the market rebounded, the economy was just beginning its downward trajectory. March saw the first large stimulus packaged being passed by the government and April saw $1,200 checks being issued to Americans under the income threshold. The rest of April and most of May seemed like a blur to most as the country was on lockdown. Cases began to rise, mask mandates were the norm, and many small businesses were beginning to close their doors. The death of George Floyd occurred at the end of May resulting in many protests and national discussions on racial injustice.

July marked the return of both the NBA, in the bubble, and the MLB. Both of which provided a springboard for many other sports to follow. Economic activity such as travel and dining out began to rise. In August and September, many students returned to school and football kicked into gear, however, both looked different with online learning and mostly empty stadiums. Covid-19 cases began to rise in December and November before coming to a head surrounding Thanksgiving travel. We saw the first real results of vaccine effectiveness in November, and by December the vaccine was being issued to American citizens. The end of 2020 saw a rise in equity prices as investors seemingly looked past the rise in virus cases and towards news of a stimulus package from the government.

Stimulus Package
On Sunday, December 27, 2020, President Trump signed a $900 billion dollar relief package for the pandemic and a $1.4 billion dollar government relief bill. Closing out the year, Monday the 28th saw the house pass a bill that would increase the recent stimulus check to Americans up to $2,000 from original amount of $600, however, the Senate did not pass the bill. Talks will continue in early 2021.

The Virus
Covid-19 is still very much a threat to the economy as we enter the new year. In the end of December, the country’s leading infectious disease expert, Anthony Fauci, stated that the worst may be yet to come. And on January 2, 2021, the United States experience its highest number of cases in a single day. In the image below, you can see that cases and deaths both began to plateau in the summer months, but that November and December saw quite the spike.


Source: Centers for Disease Control and Prevention, Johns Hopkins CSSE, J.P. Morgan Asset Management. J.P Morgan – Guide to the Markets – U.S. Data are as of December 31, 2020.

The good news is that the FDA has approved two vaccines for distribution, but the bad news is that these have not been administered as quickly as hoped. Officials are hopeful to be back on track in the near future. With cases continuing to rise, the hope is that the vaccine will curb the increase as we get through the first quarter of 2021. What is promising for investors, and as we’ve discussed throughout the year, is that we have slowly started to adapt to a social distancing type of economy. The image below shows the large decrease in economic activity at the start of the pandemic followed by a steady rise of activity in the summer months. As you can see, activity has somewhat plateaued and did not see a drastic decrease over the last two months with the rise in cases. This is promising news to show that we are figuring out how to keep the economy afloat and can continue to keep the economy open to an extent so long as we adhere to social distancing measures and certain protocols.


Source: App Annie, Chase, Mortgage Bankers Association (MBA), OpenTable, STR, Transportation Security Administration (TSA), J.P. Morgan Asset Management. *Consumer debit/credit transactions, U.S. seated diners, and TSA traveler traffic are 7-day moving averages. App Annie data is compared to 2019 average and includes over 600 travel and navigation apps globally, including Google Maps, Uber, Airbnb and Booking.com. Consumer spending: This report uses rigorous security protocols for selected data sourced from Chase credit and debit card transactions to ensure all information is kept confidential and secure. All selected data is highly aggregated and all unique identifiable information—including names, account numbers, addresses, dates of birth, and Social Security Numbers—is removed from the data before the report’s author receives it. J.P Morgan – Guide to the Markets – U.S. Data are as of December 31, 2020

Brexit
As virus cases increase in the United States, the virus is continuing to get worse in the United Kingdom as well. Even the virus could not stop Brexit from becoming official though. The United Kingdom (U.K.) officially left the European Union (EU) on January 31, 2020, but they were stuck in an 11-month limbo under the EU trading rules as the two sides negotiated. The two sides agreed to a new deal on December 24th, 2020, and as the year 2020 came to an end, the United Kingdom was officially an independent nation once again. Some major changes that are now in effect:

  • The free movement of people between the UK and EU countries has ended and has been replaced in the UK by a “points-based” immigration system
  • Anyone from the UK who wants to stay in most of the EU for more than 90 days in any 180-day period now needs a visa
  • Duty-free shopping has returned, with people coming back to the UK from the EU able to bring up to 42 litres of beer, 18 litres of wine, four litres of spirits and 200 cigarettes without paying tax
  • EU citizens wanting to move to the UK (except those from Ireland) face the same points-based system as people elsewhere in the world
  • UK police have lost instant access to EU-wide databases on criminal records, fingerprints and wanted persons.

Conclusion

While the page has flipped to 2021, it is important that we remember 2020 and not forget it. There were a lot of experiences in 2020 that shaped our current environment and just because they year is over; it does not mean that the issues have passed. There will still be political tension, race issues, differing opinions regarding Covid-19 and its vaccine, and many new issues that arise in 2021. We don’t wish to frighten you or to rial anyone up, but we want to bring to light the fact that we experienced them, we survived them, and there will be more of them in the coming year. Adhering to a disciplined investment approach that took the emotion out of investing allowed portfolios to ride the ebbs and flows of the market volatility in 2020. It is important to continue that approach in 2021 as volatility is likely to continue in today’s headline driven society. Money earmarked for the long term should be invested to handle the market movements, and money needed for the short term should be allocated to cash-like investments that are not exposed to immediate market risk. It is important that our portfolios have the correct asset allocations based on our risk tolerances as 2021 moves full steam ahead. We encourage you to reach out in order to make sure that your investments align with not only your ability to take risk, but also with your appetite for risk. Having a dynamic financial plan in place helps withstand market volatility, meet short term needs, and also allocates longer-term assets to have the best chance of achieving long term goals.

Thank you for your continued trust in Partnervest.

 

David Young
Partnervest Advisory Services, Chief Investment Officer
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager

Rebecca Valdez
Partnervest Advisory Services, Director of Investments
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager

Information is from sources deemed to be reliable, but accuracy is not guaranteed.

*Performance and pricing data used for VEGA ETF is based on the indicated value of the ETF at the close of the day.


Definitions:

Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.

The Barclays Capital U.S. Intermediate Government Bond Index measures the performance of U.S. Dollar denominated investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Cboe S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index.

The Consumer Sentiment Index is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy.

covered call option involves holding a long position in a particular asset, in this case shares of an ETP, and writing a call option on that same asset with the goal of realizing additional income from the option premium.

Delta represents the rate of change between an option’s price and a $1 change in the underlying asset’s price. In other words, the price sensitivity of an option relative to the underlying.

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

The MSCI ACWI World Index is is an unmanaged free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

An option is a privilege, sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date.

Exercising an option means to put into effect the right specified in the option contract.

An option premium is income received by an investor who sells or “writes” an option contract to another party.

A call option is considered Out Of The Money when the call option’s strike price is higher than the prevailing market price of the underlying stock. A put option is considered Out Of The Money when the put option’s strike price is lower than the prevailing market price of the underlying stock.

protective put is an option strategy which entails buying shares of a security and, at the same time, enough put options to cover those shares. This can act as a hedge on the invested security, since matching puts with shares of the stock can limit the downside (due to the nature of puts). 

The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A reading above 50 indicates expansion in the sector; below 50 indicates contraction.

put option is a contract that gives the owner of the option the right to sell a specified amount of the asset underlying the option at a specified price within a specified time.

A short position is the sale of a borrowed investment with the expectation that it will decline in value.

Theta is a measure of the rate of decline in the value of an option due to the passage of time.

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. Other Fund risks included: allocation risk; derivative risk; early closing risk; Exchange Traded Note risk; liquidity risk, market risk; trading risk; commodity risk; concentration risk; counterparty risk; credit risk; emerging markets and foreign securities risk; foreign currency risk; large-, mid- and small- cap stock risk. Please see the prospectus for detailed information regarding risk. The Fund is also subject to options risk. Writing and purchasing call and put options are specialized activities and entail greater than ordinary investment risk. The value of the Fund’s positions in options fluctuates in response to the changes in value of the underlying security. The Fund also risks losing all or part of the cash paid for purchasing call and put options. The Fund may not be suitable for all investors.

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.