VEGA: 4th Quarter 2021 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/vega.

Portfolio Update

 

  4thd Qtr. 2021 YTD
VEGA NAV 4.61% 12.17%
MSCI All County World Index 6.68% 18.54%
Cboe S&P 500 Buy Write Index (BXM) 7.86% 20.47%
Bloomberg U.S. Aggregate Bond Index (AGG) 0.01% -1.54%

As of 12.31.2021.

Fourth Quarter 2021 started off strong and, while volatility seemed to rear its ugly head in late November, the markets recovered and closed out the year at all-time highs. During Q4, the S&P 500 gained 11.0%, bringing its YTD return to an astonishing 28.7%. International Equities turned in an amazing Q4 return of 6.68% as measured by the MSCI All Country World Index bringing the YTD performance to 18.54%. Fixed Income as measured by the Bloomberg U.S. Aggregate Bond Index was a laggard with a slight Q4 loss of – 0.01% bringing the YTD performance to a -1.54%.

Top Holdings

 

Ticker Security Description Portfolio Weight %
SPY SPDR S&P 500 ETF TRUST 37.04%
EFA ISHARES MSCI EAFE ETF 20.07%
IUSB ISHARES CORE TOTAL BOND ETF 6.81%
IWP ISHARES RUSSELL MID-CAP GROW 5.94%
TIP iShares TIPS Bond ETF 3.95%
IWM ISHARES RUSSELL 2000 ETF 3.91%
XLK TECHNOLOGY SELECT SECT SPDR 3.36%
IYE ISHARES U.S. ENERGY ETF 3.31%
GOVT ISHARES US TREASURY BOND ETF 2.95%
IXG ISHARES GLOBAL FINANCIALS ET 2.93%

As of 12.31.2021. Cash not included.

Activity

Covered Calls: October’s Covered Calls expired worthless and new Covered Calls were established on SPY and EFA for November. The November SPY calls expired worthless while the EFA calls went into the money and were closed. New calls were then written for December once again on both SPY and EFA which also expired worthless. 

Protective Puts:  In November VEGA sold the Protective Puts established in the First Quarter 2021 and re-established new Put protection for 20% Notional Coverage and have an expiration of March 2022.

Tactical Shifts:  Tactical Shifts in the middle of the Fourth Quarter were reducing EEM and increasing SPY.

Volatility-Based Reinvestment:  We did not initiate any VBR’s during the fourth quarter.

Beta:  As VEGA closed out the Fourth Quarter 2021, the beta of the portfolio was approximately .67 compared to the S&P 500. This is a larger than typical deviation and reflects the risk-reduction in Fixed Income.

Market Outlook

2021 Year End Review

2021 brought its own unique set of opportunities and challenges. While we navigated another year of the virus, optimism was rewarded when it came to investing.

  • Market-watchers added ATH (all-time-high) to their financial acronym repertoire as the S&P 500 index hit 70 record highs this year.1
  • A powerful wave of retail investors came to the market in January, and with them we learned new terms such as meme stocks, HODL (hold on for dear life) and r/WallStreetBets.
  • Supply chain constraints and inflation impacted our daily lives, and inflation closed out 2021 near 40-year highs.2

2021 Market Returns3

Index Total Returns December Q4 2021 3-year 5-year 10-year
S&P 500 4.50 11.00 28.70 26.10 18.50 16.60
DJ Industrial Average 5.50 7.90 20.90 18.50 15.50 14.20
NASDAQ Composite 0.70 8.40 22.20 34.30 25.00 21.00
Russell 2000 2.20 2.10 14.80 20.00 12.00 13.20
MSCI EM 1.90 -1.20 -2.20 11.30 10.30 5.90
MSCI EAFE 5.10 2.70 11.80 14.10 10.10 8.50
Bloomberg US Agg Bond -0.30 0.00 -1.50 4.80 3.60 2.90

Source: Morningtar. As of 12/31.2021

Markets

Markets in 2021 were defined by a resilience in U.S. equities, a democratization of investing to retail traders, Elon Musk’s market-moving Twitter account, and cryptocurrency entering mainstream markets.

U.S. stock returns dominated against other markets, helped by strong company earnings throughout the year. And while it certainly didn’t feel like a straight line up, when we zoom out on the year, it was pretty darn close (see chart below). Over the calendar year, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite indices rose 28.7%, 20.9% and 22.2%3, respectively. The S&P 500 made 70 new ATHs—the most in a single calendar year since 19951. In fact, it has been an incredibly strong three years for U.S. equity markets; the strongest 3-year period we’ve seen since we were contemplating what would happen at midnight on Y2K.1

While there was significant performance dispersion throughout the year on a sector level, it was the first time since data going back to 2001 that all 11 S&P 500 sectors finished with double-digit gains.1

While there was strong performance across sectors, there was dispersion at the company level. Some of the bigger names such as Alphabet, Microsoft, Apple, and of course Tesla stand out, rising 65%, 51%, 34%, and 56%, respectively5. There was also significant volatility across companies.  One big source of volatility was from retail investors, who came with a force to the markets in January and never looked back. Also known as meme madness, social media platforms featured a few heavily shorted stocks to rally behind, e.g., GME and AMC.

But when it comes to volatility, it’s hard to beat cryptocurrency, which took center stage in the headlines this year for good reason. Bitcoin hit an ATH above $69,000, but ended the year with lackluster performance, settling at about $46,000.4 The first bitcoin futures ETFs launched providing more access to the asset, and the ProShares Bitcoin Strategy ETF (BITO) became the fastest ETF ever to hit $1 billion—garnering as much in just two days.6

And then there were bonds, an asset class that simply could not keep up in 2021. As the economy showed more signs of strength and hotter inflation, investors focused on when the Fed would start normalizing its policy stance (more on this below). The U.S. 10-year Treasury rate ended at 1.52%, up from 0.93% at the beginning of the year5, and in turn the Bloomberg U.S. Aggregate Bond Index fell -1.5% on the year.

 

The Fed and the Economy

While 2021 didn’t come without challenges (cue: large container ship gets stuck in the Suez Canal), the year was marked by rebounding economic growth as we saw one of the fastest recessions followed by one of the fastest recoveries in the U.S. By the end of Q2, real GDP had surpassed its pre-COVID peak.7

Along with the rebound in the economy, inflation hit its strongest pace in nearly 40 years and the labor market tightened (very quickly).

High inflation and falling unemployment led to the Fed’s decision to accelerate its pace of tapering at its December meeting. The current pace suggests a tapering conclusion in March 2022 and should pave the way for rate hikes next year.

What’s Next?

We believe 2022 will likely be a year of transition toward a normal state for the economy. As markets adjust in anticipation of tapering and eventual rate hikes, the road that lies ahead may be challenging for core fixed income, so it’s wise to be thoughtful about the duration and risk in this part of a portfolio.

Don’t forget that with challenges and volatility also comes opportunity. Growth next year may come from thematic global trends, innovation in the U.S., or it may be driven by a recovery across international markets. Investing in a diversified portfolio can help you participate in growth areas while buffering some of the volatility.

Thank you for your continued trust in VEGA.

Respectfully,

 

Ken Hyman
ChangePath
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager


Returns shown are total returns of indices. Returns over one year are annualized.

  1. Source: Bloomberg.com. https://www.bloomberg.com/news/articles/2021-12-31/three-monster-years-in-s-p-500-set-a-towering-bar-for-january and https://www. bloomberg.com/news/articles/2021-12-26/meme-madness-68-new-highs-superlatives-abound-in-26-s-p-rally and https://www.bloomberg.com/news/articles/2021-12-31/ for-first-time-all-11-s-p-500-sectors-in-double-digits-chart
  2. Source: Bloomberg.com. https://www.bloomberg.com/news/articles/2021-12-10/consumer-prices-in-u-s-climb-at-fastest-annual-rate-since-1982
  3. Source: Morningstar as of 12/31/2021.
  4. Source: Yahoo finance as of 12/31/2021.
  5. Source: Bloomberg as of 12/31/2021.
  6. Source: Nasdaq.com https://www.nasdaq.com/articles/bito-bitcoin-etf-becomes-fastest-etf-ever-to-hit-%241-billion-aum-2021-10-20
  7. JPMorgan Market Insights team. https://www.chase.com/personal/investments/learning-and-insights/article/a-look-back-on-the-markets-in-2021
  8. Headline CPI 12-month % change, all items. Source: US Bureau of Labor Statistics: https://fred.stlouisfed.org/series/UNRATE
  9. Unemployment rate, monthly, seasonally adjusted through November 2021. Source: Federal Reserve Economic Data. https://fred.stlouisfed.org

Past Manager Commentary

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

*Performance and pricing data used for VEGA 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 (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

The MSCI All Country World Index (ACWI) 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.